UPDATE 2-Indonesia Dec trade deficit narrows, but concerns linger

JAKARTA, Feb 1 (Reuters) - Indonesia's trade deficit narrowed in December, but exports fell much more than expected and some economists predict that 2012's first annual deficit in history might not be the country's last.

December's deficit, announced on Friday by the statistics bureau, was $0.15 billion, narrower than November's revised $0.61 billion and below what was forecast in a Reuters poll.

Cutting the deficit was a surprise 5.5 percent decline in December imports from a year earlier. But exports were a surprise in the other direction, falling by 9.78 percent on-year compared with the poll's forecast of a 2.59 percent drop.

"The key question is whether the December number represents a change in trend for the trade deficit - is the worst now over? We doubt it," wrote Credit Suisse economist Robert Prior-Wandesforde wrote in a research note.

"In particular, the weakness of imports seems very odd, given the apparent on-going strength of domestic demand, and is unlikely to last," he wrote.

Prior-Wandesforde said that while exports should recover over time, "Indonesia's consumption and investment growth is likely to outpace that of most of its trading partners."

Central to last year's high levels of imports has been robust economic growth. Many economists believe that in 2012 - for which full-year data will be released on Feb. 6 - Indonesia grew about 6.5 percent.

A factory survey on Friday also pointed to surprising weakness in the manufacturing sector in January, though most economists say Southeast Asia's largest economy remains on track for another year of robust growth.

The HSBC Market survey showed manufacturing activity contracted in January for the first time since May, even though new export orders rose.

The January purchasing managers' index was 49.7, compared with 50.7 in the previous reading and a record high of 51.5 in November. A reading below 50 signals contraction in manufacturing activity.

Similar surveys on Friday also highlighted patchiness in other Asian economies at the start of 2013, with China's factory sector managing only a shallow rebound.

DEFICIT PRESSURES RUPIAH

Indonesia always produced an annual trade surplus - until 2012. The emergence of monthly deficits and a growing current account deficit last year added to worries about the rupiah , which was the worst-performing emerging Asian currency in 2012.

On Friday, the rupiah fell 0.7 percent to 9,755 per dollar. For the year so far, it has shed 1.3 percent.

December marked the ninth consecutive month that exports fell year-on-year. The October deficit, $1.54 billion, was a record high.

For all of 2012, the trade deficit was $1.63 billion. Behind the gap were weak global markets and sharp increases in some, imports, such as machinery and fuel.

For all of 2012, exports fell 6.61 percent from the previous year, while imports rose 8.02 percent.

"While the December trade deficit shrank, we don't exactly read today's data as encouraging at all given that exports remain in the doldrums for now," said Gundy Cahyadi, economist at OCBC Bank in Singapore.

"This continued to signal that the trade account may remain under pressure in the near-term," he said.

Uncertainty over the trade and current account deficits suggests the authorities are increasingly reluctant to let the rupiah fall too fast or too much.

"The authorities are set to ensure better dollar liquidity onshore going forward. This should provide some support for the rupiah despite the still gloomy outlook on exports," Cahyadi added.

On Friday, the statistics bureau also reported a pick-up in inflation in January due to higher prices for food, beverages and tobacco products. The annual headline inflation rate was 4.57 percent, compared with 4.3 percent in December and a poll forecast of 4.5 percent.

During the month, Jakarta had massive floods that hit distribution in the capital.

The relatively low inflation, coupled with a still gloomy global economic outlook, means Bank Indonesia is likely to maintain its benchmark rate unchanged at a record low of 5.75 percent at a Feb. 12 meeting.

Indonesia's second-largest lender by assets, PT Bank Rakyat Indonesia, on Friday reported net profit and loan growth both jumped nearly 23 percent in 2012.

(Additional reporting by Adriana Nina Kusuma; Editing by Jonathan Thatcher and Richard Borsuk)