04/06/2013 (Financial Times) - Indonesia suffered an unexpected trade shortfall in April as the value of key commodity exports such as coal and palm oil continued to suffer because of slower growth in China and India.

Southeast Asia’s biggest economy recorded a trade deficit of $1.6bn, when most economists had been forecasting a small surplus, adding to concerns about the deteriorating current account position and the weakness in the rupiah.

With a large, young population, booming domestic market and plentiful natural resources, Indonesia has become one of the world’s hottest emerging markets over recent years.

However, investors have become more cautious over the past 12 months as economic growth has started to slow, the current account has fallen into a deficit and policy making has taken a protectionist turn ahead of elections next year.

The national statistics agency said on Monday that the country exported $14.7bn of goods in April, down 9.1 per cent from the previous year and 2.2 per cent from March.

Imports contracted by 3.7 per cent compared to a year earlier, to $16.3bn, as shipments of capital goods were constrained by a slowdown in investment growth.

Robert Prior-Wandesforde, an economist at Credit Suisse in Singapore, said that the pace of investment growth had halved in the past nine months, easing demand for imports and relieving some of the pressure on the current account.

But he warned that, with legal uncertainties and nationalist policy making undermining the business climate, Indonesia should not take record levels of foreign direct investment for granted.

“We’re worried about the sustainability of inward foreign direct investment,” he said. “It’s not going to change overnight but the regulatory regime has made some foreign investors think twice.”

With President Susilo Bambang Yudhoyono reluctant to take unpopular decisions in the run-up to next year’s elections, when he will step down after reaching the constitutional two-term limit, analysts say that policy making has suffered.

A case in point is the fuel subsidy, which is forecast to consume at least $20bn of the state budget this year. Mr Yudhoyono has signalled his intention to raise administered fuel prices after admitting that without a subsidy cut, his government could breach the legally mandated 3 per cent budget deficit limit.

But fearful of further damaging the popularity of his scandal-hit Democrat party before next year’s presidential and parliamentary elections, he has been reluctant to do so without widespread consensus.

Chatib Basri, the reformist new finance minister, is discussing a possible 44 per cent increase in the fuel price, to Rp6,500 or $0.66 a litre, with Indonesia’s parliament, alongside a controversial programme of cash transfers designed to ease the impact of the price increase on the poor.

But investors have warned that even such a large price increase will have only a minimal impact on Indonesia’s current account deficit.

Fauzi Ichsan, an economist at Standard Chartered in Jakarta, said that with China potentially entering an extended phase of slower growth and global energy prices likely to be kept down in the longer term by the shale gas revolution in the US, Indonesia may have to get accustomed to a structural rather than just a cyclical current account deficit.

“As long as the deficit can be funded by capital inflows, there’s no problem,” he said. “But Indonesia’s investment environment has to be very attractive so it needs to move ahead with infrastructure development and reverse concerns about the rise of protectionism.”