Emerging Asia Faces Crosswinds

Indonesia: Lowest Trade Surplus Since May 2022

Indonesia’s trade surplus came in lower than market expectations as it dipped to $3.9bn in December 2022, from $5.1bn in November. The overall trade balance for Indonesia was at a record high of $54bn in 2022, on account of higher commodity prices during the year. Although rising on an annual basis, export earnings fell by 1.1% m/m in December, as signs of slowing global growth and monetary tightening began to emerge. This was mainly on account of softening demand for commodities, as coal exports dropped by 9.4% m/m and palm oil fell by 9.5% m/m. December was the fourth consecutive month of declining m/m export earnings. Meanwhile, cumulatively, total exports surged 26.1% y-y to $292bn in 2022; major export commodities remained coal and palm oil. 

Figure 1: Indonesia Trade Balance (USD bn) 

Source: Datastream, Continuum Economics

Although our expectation for Indonesia is to record a trade surplus in 2023 as well, it would be far smaller than the record high of 2022. Although, China re-opening may result in a pick-up in commodity demand (but this would be minimal as the recovery is mainly service biased), the prospects for exports remain subdued for 2023. Additionally, China has started importing coal again from Australia and this will likely dent China demand for Indonesian coal.Basic manufacturing exports – apparel, footwear, and furniture will face headwinds from the slowdown in the U.S. and the recession in EU. Meanwhile, import growth is expected to remain steady driven by both household demand and demand for material inputs from industry. Capital goods demand (and hence imports) will remain high given the capex push by the government ahead of the elections in 2023, and as the economy enters a capex expansion cycle. Investments realization in Indonesia, excluding micro, small and medium enterprises (MSME), upstream oil and gas, and financial sector, reached IDR314.8tr in 4Q22 (vs. IDR307.8tr in 3Q22),growing by 30.3% YoY (vs. 42.1% YoY in 3Q22), with a total labor absorption reaching 339.9k (vs. 325.6k in 3Q22). Looking ahead, our expectation is that Indonesia’s goods trade surplus will remain wide (although declining from 2022 highs). Rising export volumes will offset the moderation in global prices. Nonetheless, the export sector stimulus to the economy will wane, and the IDR could come under some pressure. 

India’s Exports Remain Tepid 

Latest trade statistics from India’s Ministry of Commerce and Industry highlight that the merchandise trade deficit increased by 2.4% y/y in January. However, imports dropped by 3.6% y/y, marking the largest decline in over two years. The decline in outbound shipments outpaced the fall in imports; exports contracted by 6.6% y/y. India's goods trade deficit for the first ten months (April-January) of FY23 widened to $233bn from $153.8bn in the same period a year earlier. The increase was primarily driven by a surge in imports, which rose by 21.9% y/y, mainly due to a 53% year-on-year rise in the imports of petroleum and crude products to USD 178.5bn. The rise in imports was also supported by higher shipments of coal and electronic goods. 

Figure 2: India Exports, Imports and Trade Balance (USD mn)

Source: Datastream, Continuum Economics

A key takeaway from the latest statistics is that India’s export growth appear to be trending downward, in line with slowing global trade. Another factor to consider would be India’s continuation of a complete ban on wheat and wheat flour, an additional ban on 100% broken rice and 20% export duty in varieties of broken rice. The measures were introduced to support domestic prices of wheat and rice, and rein in price pressures, but will weigh on the external sector, as India fails to capitalise on the increased global demand for these products. The Reserve Bank of India too is conscious of the slowing export growth in 2023, and its potential drag on India’s economic growth. The central bank is also conscious of the pressure on the INR given that the FII outflows surged in the wake of the Adani controversy. 

Malaysia’s Exports Fall On Weak Demand 

Meanwhile, across the Indian Ocean, Malaysia’s merchandise export growth slowed to 1.6% y/y in January from 5.9% y/y in December, primarily due to a sluggish performance in manufacturing exports, which rose by just 0.3% y/y - the slowest pace since the start of the post-COVID economic recovery. Although, petroleum products exports continued to drive growth, rising by 87.8% y/y, the contribution of semiconductor exports, which rose by 4.9% y/y, has eased markedly since mid-2022 when their growth peaked at 49.4% y/y. On the positive side, mining exports rose by 49.9% y/y, led by a 62.3% y/y increase in LNG exports and a 25.9% y/y increase in crude petroleum exports. However, rubber products exports fell by 6.6% y/y, while chemical products exports declined by 27.9% y/y. Meanwhile, palm oil exports declined by 20.1% y/y due to a fall in palm oil prices. Exports to China continued to underperform, falling by 11.9% y/y. Malaysia's diversified export base should help to maintain resilience in exports going forward. However, subdued Chinese demand and a slowdown in the semiconductor market will be of concern in the first half of 2023. 

Overall, a stronger slowdown in EU and the U.S. will outpace any tailwinds from a recovery in China this year. As a consequence, these economies will be in the middle of crosswinds. The current global economic situation, with monetary policy focusing on inflation control rather than growth stabilization, is expected to result in weaker demand. If China's commodity demand is slow to recover in the latter half of 2023, it would be a worrying development for Asia's exporters. 

Source: World Tourism Organization, Continuum Economics