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UPDATE 3-Indonesia trade picture signals worsening economy

* Aug exports fall 24.3 pct y/y, twice as much as forecast

* Surprise fall in imports produces a small trade surplus

* PMI index indicates weakness may be sustained

* Imports of consumer goods slump 22 percent from July

(Updates with import details, background)

By Rieka Rahadiana and Neil Chatterjee

JAKARTA, Oct 1 (Reuters) - Indonesian exports and imports fell the most in three years in August, suggesting weakening third quarter growth for Southeast Asia's biggest economy that is likely to lead the central bank to keep benchmark interest rates at a record low all year.

Trade imbalances in recent months have been a concern for investors and although the unexpected drop in imports produced a slight trade surplus, economists now worry that Indonesia could finally be showing cracks from the global downturn, joining other major emerging markets.

The country's exports, 70 percent of which are commodities, tumbled 24 percent in August from a year earlier, twice as much as forecast and the worst drop since June 2009. Export orders for September also fell, according to the HSBC purchasing managers' index (PMI), showing the weakness is likely to be sustained.

Imports fell 8 percent, the first year-on-year drop for a month since November 2009. Imports of consumer goods slumped 22 percent from the previous month.

"The trade figures clearly mean that we should expect a marked slowdown in growth during the second half of the year," said Gundy Cahyadi, an economist at OCBC Bank in Singapore. "Of particular concern would be the import growth figure, as it indicates that domestic demand may be moderating further into the year-end."

Until now, buoyant domestic demand from emerging middle-class consumers and rising foreign investment have kept Indonesia's economy motoring along. In the second quarter, economic growth was 6.4 percent more than a year earlier, topping the first quarter's 6.3 percent pace.

Data released before Monday had indicated some weakening of domestic sales. The country's biggest heavy-equipment provider has said it sold 12 percent fewer machines in the first eight months of 2012 than a year earlier. Car sales in August were only 4.2 percent above one year earlier - the slowest pace since January - though that partly reflected the main Islamic holiday that month.

Surging imports prior to August did bring a worry. In June, there was a record trade deficit, which hurt the rupiah

.

"Today's data releases should partly assuage over-heating and current account shortfall concerns," said Radhika Rao, economist at Forecast, though she added that the rupiah "will remain on the backfoot."

The rupiah weakened on dollar demand from local and foreign banks, while the central bank was spotted selling the dollar to slow down the local currency's depreciation, dealers said. This year, the rupiah has been emerging Asia's worst performer, losing more than 5 percent against the dollar.

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Analyst views on trade, inflation

Graphic on Indonesia CPI

Asian factory sector struggles

Indonesia to take on debt for infrastructure

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The export weakness in August was led by oil products, which fell 38 percent month-on-month, the statistics bureau said.

For four consecutive months through July, Indonesia reported trade deficits. In August, there was a surplus of $250 million, as trade with European Union nations improved, though Indonesia continued to have a deficit with its largest trade partner China, the bureau said.

"The surplus is not yet stable," said Satwiko Darmesto, a director at the statistics bureau, adding that the trend on imports was not yet clear.

Consumption usually rises ahead of the Ramadan Islamic fasting month, which fell earlier this year in July and August, which may have affected the data. Cement sales, which have been buoyant in recent years, fell 0.1 percent in August due to fewer working days because of the Eid al-Fitr festivities.

JURY OUT

The August import weakness was led by plastics and plastics products, which fell 36 percent from July, while iron and steel fell 33 percent, showing that raw materials for manufacturing also took a hit.

Manufacturing activity in Indonesia slowed in September from a month earlier to record only a slight expansion, the HSBC PMI showed. Asia's manufacturers are continuing to struggle in the face of tepid demand from the United States and Europe.

A Reuters poll before the fresh Indonesian data saw August exports falling 12.3 percent from a year ago, due to weak demand from China. The poll had expected imports to rise 7.8 percent from a year earlier.

The weak trade picture, plus milder-than-expected inflation figures that were also released on Monday, mean Bank Indonesia (BI) will try to prop up domestic credit growth by keeping its benchmark rate steady at a record low 5.75 percent, and may use other tools to support the rupiah.

The central bank has lessened its intervention in recent weeks to allow the rupiah to slip below 9,500 per U.S. dollar, market players say. It has also moved to pop potential bubbles in vehicle loan financing by increasing mandatory downpayments.

This has led motorbike sales to fall for months, though the central bank's consumer confidence index picked up in August and other economic data does not confirm a drop in demand just yet.

Economists still expect BI to effectively tighten policy by the year-end by lifting the deposit facility rate - the bottom range for its monetary operations - to absorb liquidity.

"We think BI will likely continue tightening by lifting the deposit facility rate gradually over the next few months to 4.75 percent (from the current 4 percent) by the middle of next year, but may choose not to move this month given the improvement in the trade balance," said Chua Hak Bin, economist at Bank of America Merrill Lynch.

(Additional reporting by Adriana Nina Kusuma and Andjarsari Paramaditha; Editing by Richard Borsuk)

((rieka.rahadiana@thomsonreuters.com)(+6221 3199 7170)(Reuters Messaging: rieka.rahadiana.thomsonreuters.com@reuters.net))

Keywords: INDONESIA ECONOMY/TRADE