Indonesia's record trade deficit casts more clouds on economy

JAKARTA (REUTERS) - Indonesia's trade deficit widened to a record in July, showing the difficult road policymakers face in shrinking a big current account gap, which has battered the currency and confidence in Southeast Asia's largest economy.

Also on Monday, Indonesia reported that annual inflation in August was the highest since January 2009, at 8.79 percent, and a survey showed that manufacturing activity contracted sharply last month.

Indonesia has been one of the worst hit in the recent sell-off in emerging markets due to its rising current account deficit, which was a near-record US$9.8 billion (S$12.5 billion) in the second quarter. The current account is the sum of a country's trade balance and investment income.

In July, the trade deficit widened a larger-than-expected US$2.31 billion from a revised US$880 million the previous month due to a rise in oil imports, the statistics bureau said on Monday.

A Reuters poll had projected July's trade deficit at US$400 million.

Exports fell a worse-than-expected 6.1 percent from a year earlier while imports topped expectations by rising 6.5 percent.

"Just as it looked as though Indonesia's trade deficit may finally be stabilising, today's data provided a nasty and badly timed surprise," said Robert Prior-Wandesforde, economist at Credit Suisse in Singapore.

"The combination of slowing real income growth, the lagged effects of the monetary tightening and knock-on effects from the sharp downturn in investment spending bodes badly for consumer spending, which we expect to be the next shoe to drop in the country's rapidly faltering growth story," he added.

Markets sold off on Monday's data. The benchmark share index was down more than 3 percent at one point, and was off 2.9 percent at 0700 GMT (3pm Singapore time).

In the spot currency market, the rupiah was down 0.2 percent at 10,930 per dollar, but dealers said some trades were made at weaker levels.

Traders said the central bank was continuing to defend the psychological 11,000 mark by supplying dollar liquidity. Bank Indonesia often discourages dealers from posting weak price levels during times of high market volatility.

"The data will surely weaken the rupiah as investors will speculate that imports will be hard to tame," said Jemmy Paul, fund manager at Sucorinvest Asset Management in Jakarta.

The rupiah has tumbled nearly 12 percent this year as worries about Indonesia's fiscal health, especially its trade and current account deficits, prompt foreign investors to sell Indonesian bonds, stocks and other assets. The rupiah is the second worst-performing Asian currency in 2013, after the rupee .

Emerging markets in general have been mauled for months on fears that the US central bank will soon begin tapering its massive stimulus programme, which sent a flood of money into markets in Asia and elsewhere.

The central bank last week said it expected the current account deficit to narrow to 3.4 percent of gross domestic product from 4.4 percent in the second quarter.

The statistics bureau also reported annual inflation at 8.79 percent in August, up from 8.61 percent in July. A Reuters poll had projected 8.95 percent for August.

Core inflation, which excludes volatile food prices and administered prices, climbed to 4.48 percent in August from 4.44 percent in July.

Bank Indonesia has estimated that at year-end, inflation will be 9.0-9.8 percent.

Manufacturing activity contracted sharply in Indonesia in August and the workforce declined, according to HSBC Markit purchasing managers' index (PMI), which fell to a 15-month low.

"Government and central bank efforts to moderate domestic demand and correct external imbalances are starting to work, but policy measures are likely to be paused for now so as to avoid an overly sharp slowdown," said HSBC analysts in a research note.

Contraction in output, new orders and export orders pulled down the index for Southeast Asia's biggest economy to 48.5 from 50.7 in July. A survey reading above 50.0 signals expansion and a reading below that means contraction in manufacturing activity.

Indonesian policymakers have taken emergency measures over the last few weeks to revive investor confidence.

Last Thursday, the central bank raised its benchmark reference rate 50 basis points to 7 percent in a bid to tame inflation and boost the ailing rupiah.

The interest rate hike came less than a week after President Susilo Bambang Yudhoyono unveiled a package of fiscal measures to bolster investment and ease import growth.