Indonesia's Current Account falls in deficit

Analyst said monthly trade data suggest this has likely continued in 1Q12.

The 1998 Asian Financial Crisis and 2008 Global Financial Crisis suggest that current account surpluses are more desirable than deficits.

Morgan Stanley said:

Indonesia’s CAD appears to be driven by higher investment rather than higher consumption. The former is more desirable and would enhance future growth capacity and repayment ability of the economy.

Also, its CAD is currently being funded by more stable flows such as FDI. Meanwhile, some policy measures mitigating domestic risks that could lead to capital flight are also in place – e.g., healthy fiscal policy and pre-emptive financial regulations to reduce asset misallocation like the type seen pre-1998 and 2008.

Yet, although domestic risks can be controlled by policymakers, global risks can’t. Indonesia does not have reserve currency status, so funding risks remain if CAD continues to widen from here. Policymakers would effectively be ceding control of macro stability to global forces because seemingly stable funding flows can come unstuck in face of global macro shocks.

To meet investment needs and mitigate funding risks from CAD, more steps will need to be taken to manage balance of payments flows.

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