Indonesia:Record July trade deficit,Patience is a virtue

July trade and August inflation were released yesterday. In contrast to the previous month, this time round tradedisappointed - the deficit blew out to a record $2.3bn - while inflation was a touch slower than expected, at 8.8% yo-y. Despite the disappointing trade headline, we remain optimistic that the fuel price hike, upward monetary policynormalization and weakness in the IDR will help external imbalances correct gradually in the coming months.

    FactsTrade: The merchandise trade deficit widened to a record $2.3bn in July, vs HSBC estimates of -$798mn and consensus of -$393mn.

    - As expected, exports were weak (-6.1% y-o-y, vs HSBC -6.8% and consensus -5.4%). But imports were significantlystronger than expected, rising 6.5% y-o-y, the first increase five months. In m-o-m terms, the gain in imports was also robust at5.7% m-o-m (seas adj), outpacing the 2% rise in exports.

    - The trade deficit primarily reflected a large and ongoing shortfall in oil and gas (-$1.9bn; Chart 1). The gap in oil productsremained particularly large at -$2.4bn, vs a modest $391mn crude oil deficit and $957mn gas surplus.

    - The non-oil and gas (NOG) balance remained in mild deficit, at -$454mn. Both NOG exports and imports fell, by -2.6% and-2.3% y-o-y respectively. On the export side, ore shipments continued to rise strongly, up by over 39% y-o-y. Mineral fuelsalso rose for the first time in 14 months (+3.8% y-o-y). Together these two components added 1.3ppts to the overall rise inNOG exports. But this was significantly offset by a 6ppt subtraction from 'animal, vegetable fats & oils' (ie. palm oil), as thevolatile component fell 42.5% y-o-y.

    - As for NOG imports, demand for 'nuclear reactors, boilers, machinery and mechanical appliances' fell for a third month, by8.1% y-o-y. This accounted for 1.4ppts of the overall drop in NOG imports. Imports of vehicles also continued to fall sharply,down 23.5% y-o-y and marking the fifth straight month of decline. This accounted for another 1.3%-pts of the decline inoverall NOG imports. In line with the weakness in demand for intermediate/capital goods, iron and steel imports also fell for asecond month, by nearly 11% y-o-y. This further erased 0.7%-pts from the NOG import headline.

    - By geography, the decline in NOG exports to ASEAN and 'other main countries' eased, to -0.1% y-o-y and -1.3% y-oyrespectively. But the drop in such shipments to Europe was relatively hefty at nearly 10% y-o-y, snuffing out the mildrebound seen in June. Within ASEAN, demand from Malaysia remained weak (-18.3% y-o-y). This alone accounted for a fullpercentage point of the overall decline in NOG exports. Persistently weak demand from Japan, too, knocked slightly more thanthat off the NOG export headline (-9.4% y-o-y). Meanwhile India subtracted 0.9%-pts; shipments to the country fell 11.4% yo-y, following two months of strong double-digit gains.

    - In the overall scheme of things, Indonesia's trade shortfall with China remained by far the largest drag on the deficit. Indeedfor July the bilateral trade gap widened to a record $1.3bn (based on data going back to 2008; Chart 2).