Although the balance of payments still saw a deficit of US$46 million in the third quarter, it was far lower than the nearly $2 billion recorded in the second quarter.
By
ARI KUNCORO
·4 minutes read
Indonesia recorded some improvement in its balance of payments in the third quarter of 2019. Although the balance of payments still saw a deficit of US$46 million in the third quarter, it was far lower than the nearly $2 billion recorded in the second quarter.
This improvement was mainly due to a surplus of $1.25 billion in the balance of goods in the third quarter of 2019. As a result, the current account deficit fell to $7.68 billion from $8.15 billion in the second quarter of 2019.
Capital inflows helped offset the current account deficit. However, Indonesia\'s balance of payments remains in deficit because of negative primary income flows mainly as a result of the repatriation of funds by multinational companies, including the salaries of expatriates.
In the third quarter, primary income saw a deficit of $8.4 billion, which could be partly covered by a surplus in secondary income, which reached $1.78 billion.
In the third quarter, primary income saw a deficit of $8.4 billion.
Short-term vs. long-term trend
In October 2019 or in the first month of the fourth quarter, the trade balance looked promising. Statistics Indonesia (BPS) announced that monthly export value grew 5.92 percent in October, while annual export value fell 6.13 percent during the month.
On the other hand, imports increased by 3.57 percent month-on-month, while on an annual basis they dropped 16 percent.
Overall in October, Indonesia posted a trade surplus of $161.3 million.
The question is how to decipher the above data, which is quite confusing. First, what are the short-term versus long-term trends? Second, is the increase in imports good? The answer is rather complex and neither yes nor no. The negative annual growth indicates that the situation is not as good as before.
The situation in 2018 was different than that of 2019. In 2018, the trade war was about to start. There has been declining trend in world trade growth since the beginning of 2018, but the impact began to affect the world, including the United States and China, at the beginning of 2019.
Since March 2019, the slowdown began to be associated with a world recession. Moreover, the difference in short-term and long-term interest rates in the US - which are used to detect the possibility of a recession - have shown warning signs.
After all this time of only bad news, anything that gives positive signs will almost certainly get a warm welcome.
On the other hand, positive month-on-month export growth indicates that the world cheered the prospect of US-China trade peace, which is actually still difficult to achieve. However, after all this time of only bad news, anything that gives positive signs will almost certainly get a warm welcome.
However, this shows once again that Indonesia\'s commodity exports remain dependent on international conditions. The increase in imports on a monthly basis is also a reflection of the dependence of Indonesia\'s exports and industry on raw materials that are imported as they are not produced locally.
So far, the progress of a local industry to produce raw materials that are currently imported is very slow. During the 2006-2015 period, the percentage of production that was exported decreased from 12.6 percent to 10.4 percent. At the same time, raw material imports increased from 8.3 percent to 10 percent.
One of the strategies to increase import substitutes is the launch of the mandatory use of 20 percent blended biodiesel (B20), which will be increased to a 30 percent blend next year. However, other strategies are also needed, such as through a new licensing and investment policy that encourages industries to produce raw materials and other industrial products.
One example is the electric car industry. The Bank of America estimates that within the next 10 years, global oil demand will peak but then decline. It is estimated that by 2030, growth in global oil demand will reach zero percent per year due to the increase in electric cars.
Indonesia has good prospects in playing its part in the global automotive industry in the future.
Nevertheless, the growth of the electric vehicle industry will be hampered by a scarcity of rare minerals used in batteries, namely lithium and cobalt. Lithium reserves are concentrated in several Latin American countries, while cobalt is widely found in the Democratic Republic of Congo, where there is political instability.
In 2020, electric vehicles will account for 5 percent of global motor vehicle sales. The market share of electric cars is predicted to increase to 40 percent by 2030 and 95 percent by 2050. The signing of a government regulation on electric cars indicates that Indonesia will expand into the production of electric cars that have a domestic resource base.
Nickel and cobalt, which are both found in Indonesia, are key ingredients in batteries for electric vehicles. With a large population, Indonesia has good prospects in playing its part in the global automotive industry in the future.
ARI KUNCORO, Rector of the University of Indonesia