Hajj Surge and Trade Squeeze Drive Indonesia's Q2 Deficit Higher

Indonesia's current account deficit expanded significantly in Q2 2024, reflecting both external and domestic pressures. The deficit grew by 21% yr/yr to reach US$ 3.0bn, driven primarily by a widening services deficit and a contracting trade surplus, according to data from Bank Indonesia.

The services deficit, which surged by 12% yr/yr, played a central role in the deterioration of the current account. This increase is largely attributed to a higher number of Indonesians traveling abroad, particularly due to an expanded quota for the Hajj pilgrimage. This uptick in outbound travel has added strain to the services balance, offsetting gains seen elsewhere in the current account.

Meanwhile, Indonesia's merchandise trade surplus—a key buffer for the economy—narrowed slightly, declining by 0.2% yr/yr. This modest drop reflects a scenario where import growth outpaced export growth, a trend that poses challenges for the country’s external balance as global demand for its exports weakens amid slowing economic conditions.

On a more positive note, the primary income deficit, which captures investment income such as interest and dividends, saw a slight improvement. Inflows were robust enough to counterbalance a marginal rise in dividend payments by Indonesian corporations. Additionally, the secondary income surplus expanded, supported by an increase in remittances from Indonesians working abroad, providing a cushion to the overall current account balance.

The financial account recorded a US$ 2.6bn surplus, a marked reversal from the US$ 5.0bn deficit posted in the same period last year. This improvement was underpinned by strong portfolio investment inflows, driven by a rising appetite for Indonesia's debt securities. These inflows starkly contrast with the outflows experienced a year earlier, indicating a renewed investor confidence in the country’s financial markets. Moreover, a sharp decline in other investment outflows, particularly reduced domestic investment in foreign securities and increased private external debt repayments, further bolstered the financial account.

However, not all aspects of the financial account were favourable. Net foreign direct investment (FDI) inflows plummeted by 65.1% yr/yr, reflecting a substantial rise in domestic residents' investment abroad and a concurrent decrease in FDI inflows into Indonesia. This decline highlights potential concerns about Indonesia’s attractiveness to long-term foreign investors. 

In H1-2024, Indonesia’s current account deficit totalled US$ 5.4bn, a stark contrast to the US$ 352.1mn surplus recorded in the same period last year. The trade surplus contraction was the primary factor in this shift, declining by 22.3% yr/yr as imports surged while exports waned. On the financial front, while FDI dynamics reflected a significant outflow, the tripling of net portfolio investment inflows underscored a strong demand for local debt securities. Other investment outflows also fell sharply, contributing to the financial account's improvement.

The current account deficit accounted for 0.9% of GDP in the second quarter, bringing the first-half figure to 1.6% of GDP—already a significant increase from the 0.4% recorded for the entirety of 2023. Looking ahead, the ongoing contraction in the merchandise trade surplus is expected to exert further pressure on Indonesia’s current account, potentially expanding the deficit further as the year progresses.