Indonesia targets capital goods imports to tackle deficit

JAKARTA • Indonesia plans to review the import of capital goods for big government projects to help manage its current account deficit, the Finance Minister said yesterday, part of a series of coordinated policy measures to bolster its financial markets.

The country's rupiah currency, stocks and bonds have been sold off as investors flee emerging markets amid rising US interest rates, higher oil prices and the threat of a full blown US-China trade war.

The vulnerability of South-east Asia's biggest economy has been increased by worries about its current account deficit.

Indonesia's central bank has raised its benchmark rate by a total of 100 basis points, with the latest hike coming last Friday, amid efforts to defend the rupiah and stem capital outflows.

Finance Minister Sri Mulyani Indrawati said the current account deficit was "a source of negative sentiment" for investors, so the authorities were looking at ways to reduce it. "We will look at the content, whether a project is urgent to be completed and must import capital goods," she told reporters, describing the measure as "a short-term correction for long-term development".

Indonesia's current account deficit was 1.7 per cent of gross domestic product last year, but is expected to widen to somewhere below 2.5 per cent this year as economic activity improves, Bank Indonesia (BI) has said.

From January to May this year, Indonesia imported US$4.1 billion (S$5.6 billion) worth of goods in relation to the government's infrastructure push and another US$1.1 billion in defence equipment, central bank data showed.

The rupiah hit 14,455 per US dollar yesterday, the weakest since October 2015 as Asian currencies are roiled by global trade tensions.

BI Governor Perry Warjiyo said yesterday the central bank will work with the government to reduce the deficit and pledged to keep intervening in the currency and bond markets.

BI will remain "pre-emptive, front-loading and ahead of the curve" in its policy setting, he said, including by making sure it is ahead of other emerging markets in terms of attracting investors.

"When they want to invest in emerging markets, they will compare yields, risk premium and other things. When we make decisions, we have to benchmark ourselves against others," he said, comparing Indonesia's real interest rate to India's before and after Friday's 50-basis-point rate hike.

Dr Sri Mulyani also warned companies to prepare to absorb shocks in their balance sheets from a weaker rupiah and higher interest rates.


A version of this article appeared in the print edition of The Straits Times on July 04, 2018, with the headline 'Indonesia targets capital goods imports to tackle deficit'. Subscribe