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Economy

Indonesia's twin deficits becoming chronic

JAKARTA -- Indonesia has now run both current-account and fiscal deficits for three years in a row, a gnawing problem that is undermining its currency and could upset a high-spirited stock market.

     Southeast Asia's most populous country logged a $26.2 billion current-account deficit in 2014, the central bank reported Friday. While this is a bit smaller than the preceding year's $29.1 billion deficit, it remains high relative to the size of the economy at around 3%.

     Natural resources, such as coal and palm oil, account for a majority of the goods that Indonesia exports. With prices on all sorts of commodities down worldwide, the country has been stuck with a trade deficit for three years straight, which goes a long way toward explaining its negative current-account position. On the budget side, the fiscal deficit has quintupled in the past five years, reaching 227 trillion rupiah ($18.1 billion) in 2014, preliminary data shows.

     Investors see currencies of emerging economies running current-account deficits as risky investments and tend to sell them when seeking safety. In dollar terms, the rupiah is trading at its lowest since shortly after the Asian financial crisis broke out in 1997. "External factors" are mostly to blame for the Indonesian currency's weakness, President Joko Widodo contended Friday.

     Under Widodo, who took office last October, the government has ended costly gasoline subsidies and budgeted more for infrastructure-building. Helpfully, gasoline prices have fallen thanks to cheaper crude oil. Investors are brimming with expectation that corporate earnings and the economy will pick up: The Jakarta Composite Index of blue chip stocks advanced for a third straight session Friday, reaching an all-time high.

     While the stock index has risen 7% since Widodo's inauguration, the rupiah has weakened by just as much. The currency's slide reflects the fear that the Indonesian trade deficit will likely persist, even if the economic structural reforms expected under Widodo manage to stimulate corporate activity. The trade gap has widened not only because prices of resource exports have slumped, but also because Indonesia is importing more producer goods to satisfy domestic demand. On the export front, the slowing economies of China and other trading partners give cause for concern.

     Inflows of security investment from abroad jumped 140% to $25.8 billion last year. Much of this is "hot" money seeking quick profits. Financial market watchers fear that if Indonesia cannot rein in its twin deficits, some external shock -- say, an interest rate hike by the U.S. Federal Reserve -- may send the rupiah into a nosedive.

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