(Adds analysts comments, details)
* Q3 c/a deficit at 3.8 pct versus 4.4 deficit in Q2
* Q3 balance of payments at $2.6 bln deficit
By Rieka Rahadiana and Jonathan Thatcher
JAKARTA, Nov 13 Indonesia's large current
account deficit narrowed in the third quarter, but less than
expected and not enough to end concerns about the vulnerability
of the Southeast Asian economy to more capital outflows when the
U.S. Federal Reserve tapers its asset-buying stimulus.
Worries over the size of the deficit, which has been gnawing
at investor confidence for months, were underscored on Tuesday
when Bank Indonesia announced a surprise 25-basis-point increase
in its interest rates, saying it did so to manage the current
The balance of payments numbers highlight Indonesia's
struggle to curb import growth, especially for fuel, in the face
of weaker global demand for its exports and despite efforts to
slow domestic consumption.
"The improvement in the current account deficit was mainly
bolstered by a higher oil and gas trade surplus, in line with
sharper decline in non- oil and gas imports compared with non-
oil and gas exports, as well as a narrower deficit in services
and income trade," the central bank said in a statement.
The deficit in the current account was 3.8 percent of GDP in
the third quarter compared with 4.4 percent in the second, and
the equivalent of $8.4 billion.
That was worse than the government's 3.3-3.5 percent
prediction and a median 3.7 percent in a Reuters poll of
economists. The overall balance of payments deficit rose to $2.6
billion from $2.5 billion in the previous quarter.
Graphic for current account: link.reuters.com/xan64v
Finance Minister Chatib Basri said last week that improving
the current account was his priority even if it did mean forcing
down growth in Southeast Asia's biggest economy.
"The risk is that the CAD (current account deficit) will
remain large over the next few quarters, leaving the rupiah
vulnerable to potential swings in global capital flows," Goldman
Sachs said in a research note.
"There is also a risk that capital inflows could be less
than normal even if we do get to a sustainable CAD level.
Renewed concerns over the impact of Fed tapering on large CAD
countries could also add to (rupiah) depreciation pressures."
It forecast the rupiah would fall to 12,000 to the
dollar in three months, a level not seen since March 2009.
The rupiah was trading at 11,600 per dollar before the
announcement which came after the local market had closed. That
is a 4-1/2-year low and some 17 percent down since the start of
the year, the steepest decline of any Asian currency. Weakening
all year, it took a heavy hit after news in August that the
second-quarter deficit in the current account had ballooned.
Much of the concern with the current account has focused on
rising fuel demand by the former OPEC member, which has seen a
steady decline in oil production.
"A sustained deficit in the oil trade balance is the main
factor behind the wider current account deficit since 2Q 2012.
Daily production of crude oil has been on a gradual decline and
net imports of refined oil have continued to grow as the
consumer base expands," said Singapore-based DBS economist Gundy
"This is unlikely to change in the near term ...
Furthermore, it is unlikely that there will be another
adjustment in the subsidised fuel price in the near term." He
expected the current account deficit to ease slightly to 2.5
percent of GDP in 2014 from about 3-3.2 percent this year.
The central bank statement underlined its concerns, saying
measures were needed to control fuel consumption.
Bank Indonesia has now increased its main interest rates by
175 basis points since June. It said earlier this month it was
comfortable with the current exchange rate and, with the end of
massive intervention, has been rebuilding its foreign exchange
A number of economists expect more rate rises next year and
a subsequent trimming back in bank credit growth.
Economists have warned that with elections next year - for
parliament in April and the presidency in July - that several
members of the cabinet are already more focused on votes than
"The problem is in implementation of policy," said David
Sumual, economist at PT Bank Central Asia in Jakarta.
The government unveiled a fiscal package in August,
including measures to draw more foreign investment, but has
still not spelled out the details. It is planning another
package soon aimed at improving business conditions in a country
listed by the World Bank as one of the most difficult to operate
But economists said Indonesia's position appears stronger
than a few months ago and the central bank was praised for what
one economist called a "brave" decision to raise rates.
"Indonesia is coming to the party in the sense that its
policies are looking more credible. It is getting interesting,
we are getting down to levels that balances some of the risks on
account of the tapering in the U.S.," said Gary Dugan,
Singapore-based CIO at Coutts, who currently prefers fixed
income exposure through dollar bonds.
"On credits, we are looking to buy quite soon and on
equities we are underweight. The safe bet for bonds is go
through the dollar route initially and local bonds will look
attractive if the currency can hold on to these levels."
"The equity market is not that expensive. It's a good
long-term story, but we need to see the end to bad news before
we start buying."
Foreign holdings of Indonesian local currency government
bonds dropped from 302.94 trillion rupiah ($26.13 billion) in
May to 284.01 trillion in August over worries about tapering of
bond purchases by the Federal Reserve.
But after the Fed surprised markets in September by
postponing the start of the wind down of purchases, risk
appetite has improved propelling inflows back into Indonesian
local debt. Foreign holdings have since grown to 319.46 trillion
rupiah as of Nov. 11.
"(The buying of Indonesian dollar bonds) shows people want
the country exposure but not the currency exposure," said
Denmark-based Saxo Bank CIO Steen Jakobsen.
($1 = 11,592.5000 Indonesian rupiah)
(Additional reporting by Umesh Desai in Hong Kong; Editing by