Home Gold & Precious Metals Bad News: Indonesia Current Account Deficit  USD -5.0 Billion

Bad News: Indonesia Current Account Deficit  USD -5.0 Billion



A positive macro picture for a land one is looking at investing in is a good prerequisite, and the purpose of this report is to assess if Indonesia has a positive macro environment within which to invest.

One can summarize the national accounts in the following formulae:

Private Sector [P] = Government Sector [G] + External Sector [X]


GDP = Private Sector [P] + Government Sector [G] + External Sector [X]

These are accounting entities and are true by definition.

See the methodology section below for more detail on this formula.

The private sector is where the stock market is and we as investors want the stock market to go up. The stock market can only go up if the flows into it are positive. The private sector derives income from three sources:

  1. Credit creation from banks. – Banks lend more than is repaid in loans.

  2. Externally from overseas commerce.- Exports bring in more than imports cost.

  3. Government spending. – More is spent than taxed.

In an ideal scenario, the private sector would receive large, and growing income flows from all three sources, and at the very least, the overall impact should be a positive flow even if one or two of the three flows are negative.

The stock market in the private sector, as well as all other private financial assets, should rise if the overall income flow into the private sector is positive. Certainly, the stock market would be unlikely to rise if the income flows were negative. Even in a shrinking economy, some sectors can grow while the rest of the pie shrinks.

We will look at each inflow in turn and start with the private sector, all the while updating our forecast result based on the latest data.

Private Sector

The chart below shows the level of private credit creation entering the private sector through commercial banks.

The chart shows that over the last year fiscal flows from credit creation have increased the stock of private credit by about $23B in 2016 and look to do the same in 2017. This is a positive trend for the private sector.

Credit growth looks to be on trend to contribute 2.5% of GDP in 2017 and has an impressive loan growth rate of over 8% and looks to be able to sustain this rate going forward.

External Sector

The external sector captures trade and commerce with other countries and is best captured by the current account. The current account is exports minus imports, and it also captures capital flows in and out of the country from financial transactions and investments. A positive overall result is best.

The chart below shows the current account balance. The chart shows the current account negative and draining the private sector of funds. The data just to hand for June points to a lower deficit this year than last when is a positive trend. One might forecast that the deficit will be less as a percentage of GDP in 2017 than it was in 2016.

History shows that Indonesia is capable of making external surpluses and looks to be trending that way again.

Government Sector

The government budget is shown in the chart below.

The chart shows that over the last year the government has been spending into the economy and adding to net financial assets in the private sector. This is a positive trend.

The data only goes to 2016 and one can only assume that the current relatively flat trend will continue into 2017.

Sectoral Analysis Methodology

Each nation state is composed of three essential components:

  1. The private sector

  2. The government sector

  3. The external sector

The private sector comprises the people, business and community, and most importantly, the stock market. For the stock market to move upwards, this sector needs to be growing. This sector by itself is an engine for growth and innovation; however, it only needs income from one or both of the other two sectors to grow.

The government through its Treasury also sets the prevailing interest rate and provides the medium of exchange. Too much is inflationary and too little is deflationary. It puts the oil in the economic engine and can put in as much as its target inflation rate allows. It is not financially constrained. For a sovereign government with a freely floating exchange rate, any financial constraint such as a matching bond issue is a self-imposed restriction. A debt ceiling is also a self-imposed restriction as is a fiscal brake.

The external sector is trade with other countries. This sector can provide income from a positive trade balance, or it can drain funds from a negative trade balance.

For the stock market in the private sector to prosper and keep moving upwards, income is required to be put into the flow. Otherwise, the sector can only circulate existing funds, or is being drained of funds and is in decline.

The ideal situation is that the private sector has a net inflow of funds and is always growing, thus giving the stock market headroom within which to expand in value. For this to happen, one or both of the other sectors have to be adding funds to the circular flow of income.

The following formula can express this relationship:

Private Sector = Government Sector + External Sector


GDP = Private Sector + Government Sector + External Sector

These are accounting entities.

For the best investing outcome, one looks for countries with stock markets located in private sectors that are receiving positive income flows overall. Top marks come where private credit creation, the government sector, and external sector are all in plus and trending upwards. Indonesia gets top marks as all three are positive and trending upwards.

Conclusion, Summary, and Recommendation

When we take our inputs and place them in our formula, we can calculate the following sectoral flow result based as a percentage of GDP. The numbers in absolute terms are growing because GDP is increasing.

Private Sector Credit Creation


Government Sector


External Sector





2.5% 2.46% -1.8% 3.16%






(Source: Trading Economics and Author calculations based on same)

The Indonesian sectoral flows are positive and moderately strong at just over 3% and look to modestly accelerate into 2017 due to a better current account result so far this year.

There is scope for financial assets such as stocks, bonds, and real estate to rise given that the private sector is receiving a positive inflow of funds. The growth rate is not extraordinary though, for an emerging market, and there are definitely better alternatives out there. Investors wishing exposure to the Indonesian stock market can make use of the following ETFs:

(EIDO) iShares MSCIIndonesia ETF
(IDX) VanEck Vectors Indonesia Index ETF

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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