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  • Emerging Markets Debt Daily

    Indonesia Struggling to Reduce Trade Gap

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    January 15, 2019

    Indonesia policymakers need to stay vigilant to reduce the trade balance gap. China’s latest monetary and credit aggregates show that past policy moves have started to bring results, supporting the official stance against large-scale stimulus.

    Indonesia’s latest foreign trade numbers show that reducing the country’s external gap is not an easy task. The trade deficit narrowed in December (USD1.102B), but the annual trade gap was the largest on record. The government’s efforts to curb public sector investments have started to bring results (capital goods imports fell by 0.3% year-on-year in December), and the past rate hikes should help to cool down domestic demand. However, the weakness of exports is concerning. Specifically, the reduction of coal exports to China may turn out to be a longer-lasting headwind, given structural changes in the Chinese economy.

    China’s total social financing1 showed stronger signs of life in December, accelerating more than expected to CNY1.589B – in part on the back of corporate bond issuance. The 12-month running new CNY loans continued to grow higher against the backdrop of the ongoing withdrawal of shadow financing (see chart below) – another positive development which shows that past accommodative policies are working and which helps to explain why authorities are reluctant to use another massive stimulus, focusing on targeted measures instead (check Premier Li Keqiang’s remarks at the State Council meeting yesterday).

    The macro flow in the developed markets boosted the U.S. dollar in the morning trade. Germany’s real gross domestic product growth moderated to 1.5% in 2018 (the weakest since 2013), raising yet another question mark over the strength of domestic activity in Europe. January’s Empire State Manufacturing Index2 in the U.S. was also underwhelming (down to 3.9 and below consensus), but market reaction to the release was muted. The dollar’s strength drew support away from many emerging markets currencies, which spent most of the morning in the red.


    Chart at a Glance

    China Lending: New Loans Up, Shadow Financing Down

    Source: VanEck; Bloomberg LP


    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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