Indonesia's Narrowing Surplus Weighs on IDR
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Bottom line: Indonesia's trade dynamics have recently displayed a concerning trend as the country’s trade surplus continues to shrink. July's trade report indicated a decline in both exports and imports, resulting in a narrow trade surplus of USD 1.3bn. The trade surplus' decline aligns with the slump in commodity prices, especially compared to the peaks witnessed in 2022. This development has significant implications for the Indonesian economy and its currency, the rupiah. An external sector stimulus wanes, economic activity levels are likely to slow, and thus, domestic demand.
Figure 1: Indonesia Trade Balance (USD bn)
Source: Datastream
Shifting Trade Dynamics
Export performance has been a key driver behind the dwindling trade surplus. The data revealed that exports fell by 18% y/y, largely in line with our expectations. Notably, coal exports plummeted by 46.1% y/y, as demand from China remained subdued. Meanwhile, lower demand from India, as it increases soy oil imports, saw palm oil exports fall by 19.3% y/y. These declines can also be attributed to a combination of other factors, including global shifts in energy consumption patterns and environmental concerns impacting demand for fossil fuels, as well as supply chain disruptions affecting the palm oil sector.
Import figures exhibited a milder contraction, with an 8.3% y/y decline. This was less pronounced compared to the 18.3% y/y decrease seen in June. The slowdown in import contraction between June and July was driven by a rise in consumption and capital goods imports. However, intermediate goods imports, often considered a leading indicator of production and manufacturing, declined, signalling potential challenges in the supply chain. Overall, these dynamics led to a 69% y/y decline in trade surplus in July, while in cumulative terms, the trade surplus has dipped by 27.2% y/y in the Jan-July 2023 period.
IDR Under Pressure
The shrinking trade surplus holds implications for Indonesia's currency, the rupiah (IDR). Historically, a healthy trade surplus has provided support to IDR’s value, contributing to its stability. In 2022, the record high trade surplus of USD 7.5bn played a role in IDR’s performance. However, the current trend of narrowing surpluses suggests that this support might wane, potentially leading to increased volatility and depreciation pressures on the rupiah.
This potential vulnerability of the rupiah has prompted Indonesian authorities to take measures to safeguard the currency's stability. The move to encourage exporters to retain a portion of their export receipts within the country is aimed at bolstering dollar liquidity. This strategy could help mitigate some of the challenges arising from the decreasing trade surplus and provide a buffer against potential currency fluctuations. Bank Indonesia (BI) is also keeping a close watch on the situation. While BI has refrained from adjusting interest rates, the narrow interest rate differentials (25 basis points) between Indonesia and other economies raise the possibility of a rate hike if the Federal Reserve opts to raise rates further. Such a move from BI would be driven by the goal of maintaining foreign exchange stability, as opposed to curbing inflation, which remains at manageable levels.
Looking forward, the trajectory of Indonesia's trade balance will likely be influenced by multiple factors. The global economic recovery and shifts in demand patterns will play a crucial role in determining the direction of commodity prices, thereby impacting Indonesia's export revenues. Moreover, the ongoing concerns related to supply chain disruptions and environmental considerations can significantly affect Indonesia's export-oriented sectors, requiring the government to adopt strategies that promote diversification and resilience in the export portfolio over the medium term.Finally, the China growth outcome will be important and we are forecasting a slowing to 4% growth in 2024, but with downside risks (here).