Analysis: Import Demand to Decline: DBS
The country’s trade balance is poised to narrow sharply this year. Indonesia has seen strong growth relative to its trade partners over the past few years, and this has translated into more robust demand for imports than exports.
Concerns about the global economy have also reduced commodity prices over the last four or five quarters, exacerbating the drop in the merchandise trade balance.
In the immediate term, Indonesia must contend with considerable resource policy headwinds. Two factors, commodity prices and import growth, will be critical to improve the trade balance.
We expect selective monetary tightening to dampen import growth starting in the second half and have factored in a tentative recovery in commodity prices in 2013.
Commodity prices have not been favorable for the past several quarters. Coal prices have dropped by about 30 percent since the first quarter of 2011, while palm oil prices are down by about 16 percent.
Meanwhile, the broader Commodity Research Bureau index is down by 20 percent. This has a large effect on net commodity exporters, or countries such as Indonesia whose commodities make up about 50 percent of exports.
The non-oil commodity trade balance narrowed from a peak of $8.7 billion in May 2011 to $6.8 billion in April this year, as price effects drove non-oil commodity exports down from $9.0 billion to $7.7 billion.
Had commodity prices been 10 percent higher, the country could have avoided the trade deficits registered in April and May.
Policy changes also play a part. Although Indonesia is one of the world’s largest exporters of natural gas, the government allowed private firms to import liquefied natural gas last year to cope with rising energy needs. Gas imports increased by 180 percent from January to May this year compared to the same period last year, and state-owned gas firm Pertamina is expected to ramp up imports next year.
Seven LNG terminals will be built in eastern Indonesia to facilitate gas imports. In May, the government also banned the export of 14 metal ores including copper, lead, nickel and gold. These moves are part of a plan to stop all ore shipments by 2014 and move processing capabilities onshore.
The slashing of export taxes for processed palm oil last October has also made Indonesia more competitive. This should augment the seasonal increase in refined palm oil exports in the coming months.
On balance, these policy steps will weigh on export growth, and still-depressed commodity prices are not helping.
A moderate rebound in commodity prices has been penciled in for 2013, but this is contingent on the performance of the global economy and China in particular.
Lower oil prices will ease the strain on the country’s trade balance. As a net oil importer, Indonesia has seen its oil balance generally worsen during the last three years as Brent crude prices rose.
Each $10 per barrel increase in oil prices is estimated to widen the oil trade deficit by about $2.5 billion a year. In recent months, the oil trade deficits have been at levels seen in mid-2008 when Brent crude prices were at $135 a barrel. With a drop of more than $20 a barrel since March, there should be a narrowing of the oil trade deficit.
The Indonesian economy’s robust growth in a subpar global growth environment has led to a widening in the country’s non-commodity trade deficit. Since the start of 2010, the non-commodity trade balance has widened from $1.8 billion to $5.6 billion in April.
Record-low global interest rates have also given the central bank leeway to cut its policy rate and allow more investment-driven growth.
The import of capital goods has increased alongside raw material imports since the trough in the first quarter of 2009. Despite the euro zone debt crisis, policy noise on a proposed fuel price hike and a weakening rupiah, there have been no signs of investor enthusiasm waning.
In contrast, consumer goods imports have gone sideways since mid-2011 as worries about inflation and a potential fuel price hike weighed on consumer sentiment. Bank Indonesia has already embarked on selective monetary tightening through stricter conditions for vehicle and property loans.
Selected interest rates have also been allowed to rise, while a weaker rupiah should reduce demand for consumer goods. This suggests loan growth and economic growth will slow, dampening import demand.
Eugene Leow is an economist at DBS Group Research in Singapore.