Oil Price & Indonesia Current Account Deficit

In July, oil price has fallen around 9% from US$62 to US$57/barrel (as of 21 July 2015). The drop in oil price was driven by Iran nuclear deal which may increase oil supply in the future. So what’s the impact on Indonesia economy?

Oil Price Movement (source: bloomberg.com)

One angle to see the impact is through current account balance point of view.

Indonesia economy has been in the spotlight in late 2012 as it experienced the current account deficit (CAD). Some people use the CAD as an indicator of overheating economy. Expansion economy stage that Indonesia enjoyed in 2005–2012 with average GDP growth ~5.9%, took its toll on import side. The upstream industry in Indonesia is not well developed and thus many companies had to import for raw materials to machineries (capital goods). The expansion stage put pressure on import which in turn pressure the trade balance. On the other side, Indonesia heavily rely on commodities (raw) in generating export revenues. As the commodities price tumbles, and so does Indonesia’s export revenue. Reduced export while import keep rising, became the seed for the CAD. Another thing why import keep on rising is because Indonesia is a net-oil importer since 2004. With current oil price drop to ~$50/barrel, it should give a relief on Indonesia CAD case.

From 2004–2013, the oil volume grew on average 20% p.a, and using Q1 2015 data, the oil volume could down 14% in 2015 (annualized data). Assuming:

  • The oil price $60/barrel
  • Export down 3% (the same pace in the last 2 years)
  • Exchange rate at Rp13,500/$

The best case for CAD in 2015 is to reach -1.6% of GDP. The very moderate (or base) case for this simulation is to assume the oil import to down 5% (vs -3.7% in 2014), and non-oil impor down 4% (vs -4.7% in 2014). The result is CAD should reach -2.8% by end of 2015.

*in 2012 to 2014, Indonesia CAD: -2.9%, -3.2%, and -3.0% of GDP respectively.

— -end of post #2