Rupiah Under Pressure from Record Current Account Deficit

Indonesia's current account deficit (CAD) reached a historic high in the second quarter, reaching US$12.5 billion or 3.3% of its gross domestic product (GDP). This is the highest quarterly deficit ratio since the fourth quarter of 2018, according to Bank Indonesia.

The record CAD is largely due to skyrocketing global oil prices, which has put pressure on the rupiah's exchange value. Economist Intelligence Unit Asia analyst Tay Qi Hang notes that while the reading is 'clearly weak,' he does not consider Indonesia's external position as being in bad shape yet.

However, if the deficit persists at this level, it would cause downward pressure on the rupiah and make Indonesia more dependent on foreign capital to finance the deficit. This could lead to increased vulnerability to portfolio outflows, higher external borrowing costs, and a tighter monetary policy to support the rupiah and preserve investor confidence.

The current account is calculated by adding up the value of all goods, services, and transfers entering an economy, and subtracting the value exiting the economy. A widening CAD means a country requires more foreign currency to pay for imports, services, and cross-border income payouts than it generates from its own exports and inflows.