July 3, 2018 / 10:56 AM / 4 months ago

UPDATE 1-Indonesia to review capital goods imports to control deficit

* Capital goods imports for big govt projects to be reviewed

* Deficit “a source of negative sentiment” for investors - finmin

* Says firms must be braced for shocks from rupiah, higher rates (Adds central bank governor comments, context)

JAKARTA, July 3 (Reuters) - Indonesia plans to review the import of capital goods for big government projects to help manage its current account deficit, the finance minister said on Tuesday, part of a series of coordinated policy measures to bolster its financial markets.

The country’s rupiah currency, stocks and bonds have sold off as investors flee emerging markets amid rising U.S. interest rates, higher oil prices and the threat of a full blown U.S.-China trade war.

The vulnerability of Southeast Asia’s biggest economy has been increased by worries about its current account deficit.

Indonesia’s central bank has raised its benchmark rate by a total of 100 basis points, with the latest hike coming on Friday, amid efforts to defend the rupiah and stem capital outflows.

Finance Minister Sri Mulyani Indrawati said the current account deficit was “a source of negative sentiment” for investors, so authorities were looking at ways to reduce it.

“We will look at the content, whether a project is urgent to be completed and must import capital goods,” Indrawati told reporters, describing the measure as “a short-term correction for long-term development”.

Indonesia’s current account deficit was 1.7 percent of gross domestic product last year, but is expected to widen to somewhere below 2.5 percent in 2018 as economic activity improves, Bank Indonesia (BI) has said.

During January to May this year, Indonesia imported $4.1 billion worth of goods in relation to the government’s infrastructure push and another $1.1 billion in defence equipment, central bank data showed.

The rupiah hit 14,455 per dollar on Tuesday, the weakest since October 2015 as Asian currencies are roiled by global trade tensions.

BI Governor Perry Warjiyo said on Tuesday the central bank will work with the government to reduce the deficit and pledged to keep intervening in the currency and bond markets.

BI will remain “pre-emptive, front-loading and ahead of the curve” in its policy setting, he said, including by making sure it is ahead of other emerging markets in terms of attracting investors.

“When they want to invest in emerging markets, they will compare yields, risk premium and other things. When we make decisions, we have to benchmark ourselves against others,” he said, comparing Indonesia’s real interest rate to India’s before and after Friday’s 50-basis-point rate hike.

India, Indonesia and the Philippines are considered Asia’s most externally vulnerable economies due to current account deficits and also due to their appetite for oil imports.

Finance Minister Indrawati also warned companies to prepare to absorb shocks in their balance sheet from a weaker rupiah and higher interest rates. (Reporting by Maikel Jefriando and Gayatri Suroyo; Editing by Richard Borsuk and Jacqueline Wong)

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