As expected, the global economic recession has started to hit Indonesian exports. Exports in October dropped by 11 percent from September, reaching the lowest level since April this year. The year-on-year growth of non-oil exports was still a healthy 22 percent, but this is well below the 28 percent recorded in September.
And all indications point to continuing weakening of our exports in the coming months as the world economy worsens.
Exports to the United States and China fell in October, but it is only a matter of time until exports to other countries fall as well. According to the World Bank, world trade will shrink by 2.5 percent in 2009, the first contraction of its kind since 1982.
The World Bank is also projecting that the economic growth of developed countries will suffer a contraction of 0.2 percent. On the other hand, economies in Asia will still grow by around 6 percent. Although this is high by world standards, it is far below the 10 percent level experienced this year.
The main driver for Indonesia's export growth last year and this year was commodity exports. For the period of January-October 2008, exports of edible fats and oil grew by 72 percent from same period last year. Strong growth was also recorded for other products: mineral fuels (50 percent), oil and gas (50 percent), rubber (33 percent). The steep increase in exports was due to steep increases in prices: In July, commodity prices rose between 50-60 percent from the year before.
But the severe economic downturn has, since August, reversed the trend, with commodity prices tumbling by as much as 40-50 percent, a trend that will continue until next year. According to the World Bank, non-oil commodity prices will plunge by an average of 23 percent in 2009.
But volumewise the decline will not be as severe as the prices. Demand for edible fats, for instance, and demand for coal for power generation should be rather inelastic in the face of the slowing economy, as people have to eat and use electricity whatever state the economy is in. Therefore, unlike other industries, palm oil companies and coal mining companies have not shelved their capital expenditure plans for next year.
Indonesia has been doing fairly well in its exports of skill-intensive products. Exports of machinery and electrical equipment are among the top three, following minerals and edible fats. The machinery and electrical equipment industries have benefited from the growing production specialization in the region, where one country produces the parts or components in which they have comparative advantage.
These products are then exported to other Asian countries that have the skills in assembling them into finished products and that then export them as branded consumer durables. Growth of exports of these products from Indonesia has been slowing down, and a further decline could be expected for next year as exports of these products from Asia to the United States and the European Union have been hit hard by the weakening economy in those countries.
Another manufacturing area where Indonesia has been losing its competitive edge is in textiles and textile products. In the 1990s, textiles were the star performers in Indonesian industrialization, growing strongly in the back of the influx of foreign investment from Japan and South Korea that took advantage of the cheap and abundant labor in Indonesia.
Even after the crisis in the late 1990s, these industries still experienced double-digit growth. But they are now getting less competitive because of a lack of investment in new machinery and technology, higher labor costs and deteriorating infrastructure. Their double-digit growth has disappeared because of growing competition from low-cost producing countries such as Vietnam and China.
The problems with textile exports will be compounded next year, because exports to the United States, the industry's biggest market, will face fierce competition from China, which will put more emphasis on its lower-end products because of the reduced purchasing power of U.S. consumers. Because the industries are labor-intensive, this setback will be a blow to any efforts to reduce unemployment.
Imports of non-oil and gas products this year up to September reached US$5 billion, substantially higher than in the same period last year. More than half of Indonesia's non-oil imports came from East Asian countries. China supplied 15 percent of those imports, the most of any single country.
In fact, imports have been growing more than exports this year, bringing down the trade surplus from $4.4 billion in first quarter to $1.4 billion in third quarter. It is a sign that economic growth is still sufficiently strong that most of the import growth came from the imports of raw materials and capital goods.
Imports of capital goods in the third quarter were worth $6.1 billion, nearly 40 percent more than the level in the first quarter. But with the slowing down of the economy and the steep depreciation of the rupiah, imports will decline sharply next year. As firms face weakening sales, they will reduce output and so imports of raw materials will come down.
The recent high level of capital goods imports means that if planned factory constructions are implemented, there will be a substantial excess production capacity. Until this capacity is fully utilized, the need for additional imports of capital goods will decline substantially.
If non-oil exports continue to fall at the same rate as in October until December 2008, then exports for the whole of 2008 will be around $108 billion, still a $15 billion increase over 2007. During the same period, oil and gas exports could reach $29 billion, or a 30 percent increase over last year.
If the December 2008 level of non-oil exports holds for the next 12 months, then exports in 2009 will be worth $96 billion -- a drop of 10 percent from this year -- while oil and gas exports, because of lower prices, will decline from $29 billion to $22 billion. Total Indonesian exports in 2009 will be around $118 billion -- a decline of 17 percent from the 2008 level.
These projections are based on the assumption that the draconian measures taken by industrialized countries start to show results in the second half of 2009. A drop of around 20 percent in exports would not be a disaster, but it would still have significant losses in terms of foreign exchange revenue and employment.
To mitigate the severe impact of the global economic slowdown on exports, more aggressive marketing should be directed to countries outside the 12 major export destination countries cited in the monthly Central Statistics Agency (BPS) report. These countries include those with relatively strong growth, such as India and countries in the Middle East.
This year, exports to these countries made up 37 percent of total exports, up from 34 percent last year. Therefore, more diversification to these countries should lessen the adverse impact on exports. Efforts to revive manufacturing exports through production-enhancing policies to enable industries to become more efficient and competitive should be urgently implemented.
The government could help with these measures in ways such as immediately improving infrastructure, maintaining harmonious labor relations, taking action against illegal imports and offering tax relief especially for exporters. Unless these urgent measures are taken immediately, a steep fall in exports will not be prevented.
The writer is an economic analyst.
