Economy Inflows remained strong and foreign reserves climbed above USD 100bn in March. While trade surplus is expected to remain steady, portfolio flows would be sensitive to inflation and rates expectations - DBS Vickers

Foreign reserves increased a sizeable USD 6.1bn in March, climbing above the USD 100bn mark to reach a new record high of USD 105.7bn. The accumulation in foreign reserves was largely aided by the widening surplus in the balance of payments, aside from the FX gains in non-dollar reserve assets last month. The merchandise trade balance should have maintained a steady surplus of USD 2-3bn in March, compared to USD 2.4bn in February. Exports to Japan contracted by 25% m-o-m in March according to the preliminary information from the statistics agency. In absolute terms however, the overall export value was cut by a limited USD 0.4bn.Meanwhile, despite the ongoing deterioration in oil trade deficit, trade surplus in natural gas has been well sustained, therefore the overall energy exports and imports are still balanced.

With regard to the financial flows, foreign holdings of Indonesian government bonds increased a strong USD 1.7bn in March. Headline inflation recently slowed to 6.7% y-o-y in March from 6.8% in Feb and the peak of 7.0% in Jan, taming investors’ expectations for rate hikes. Going forward, portfolio flows (mainly foreign investment in debt securities including bonds and SBIs) should remain sensitive to the expectations on interest rates and inflation, as well as the liquidity conditions and risk appetite in global financial market. The near-term inflationary pressures (for 2Q) seem to be easing, as food prices are retreating thanks to domestic harvest, and the government’s fuel price deregulation plan has been postponed from April. It is rational to expect Bank Indonesia to keep rates unchanged for the second consecutive month at 6.75% when they meet next Tuesday. Further afield, the uncertainties surrounding inflation forecast in 2H will be high however, depending on the movement in global oil prices and the timing of the implementation of fuel price deregulation.