One of the factors behind the slowdown of Indonesia's gross domestic product (GDP) over the last several quarters was the declining contributions from export growth. Export growth in the GDP component in the fourth quarter of 2013 was still 7 percent year on year. But since then export growth in the GDP component has collapsed. Its growth has been negative over the last five quarters, reaching an average of negative 1.5 percent. As exports account for a quarter of Indonesia's GDP, the magnitude of the fall has been a drag for the GDP growth.
Since more than half of Indonesian exports consist of commodities, the recent sharp fall in global commodity demand and prices have significantly affected Indonesia's export performance. But in terms of market destination, the fall of Indonesia's exports to China has been the most dramatic.
In 2014, exports to China fell 22.5 percent from 2013. But the debacle still continued. In the first quarter this year, exports to China fell a massive 34 percent. The drop of exports to China was the biggest, accounting for 60 percent of the fall in non-oil and gas exports.
The trade relationship between Indonesia and China has been dominated by the commodity sector. The rapid growth in China has boosted its imports of commodities and being a commodity exporter Indonesia has benefitted from China's growth. In the energy sector, China's need for coal has soared and now coal accounts for half of China's energy needs. Responding to China's need for coal, Indonesia has invested heavily in coal mining so that over the last 10 years, coal production in Indonesia has quadrupled. With production outstripping domestic consumption, Indonesia has become the largest contributor to the growth in the volume of global coal exports. In mid-2000 the most coal exports went to Japan (20 percent), while exports to China were only 3 percent. But by 2011, China had surpassed Japan and emerged as the biggest importer of coal from Indonesia, taking 30 percent of Indonesian coal exports.
Coal is not the only major Indonesian export to China, as Indonesia is also the biggest supplier of rubber to China. According to the UN's Food and Agriculture Organization (FAO), over the last decade Indonesia's rubber exports to China as a share of total exports rose from a mere 3 percent to 25 percent in 2011. Indonesia has emerged as the biggest supplier of rubber to China after Thailand. Over that time, China's imports of rubber grew at an annual rate of 7 percent, half of which was contributed by Indonesia.
Reflecting the slowdown in coal demand from China, the volume of Indonesia's coal exports to China in 2013 rose by only 12 percent, compared with a robust growth of 92 percent in 2010. Its export value fell by 5 percent in 2013 compared with a jump of 109 percent in 2010. Rubber exports had also fallen from US$1.8 billion in 2011 to $1.3 billion in 2013.
But even if China's economic growth recovers to match its recent trends, it is not certain that China's demand for Indonesian coal as a source of energy would automatically increase. Data from China showed that its coal imports fell by a considerable 37 percent in the first four months of this year from the same period last year. But slower growth will not be the only problem for Indonesian exports to China. There has been other reasons why China has sharply reduced its coal consumption. In an effort to reduce pollution, China has reduced the share of coal in its energy mix and China has been using energy more efficiently. According to China's National Development and Reform Commission, energy consumption per unit of the GDP fell by 5.6 percent in the first quarter of 2015 from the same period last year.
Investment in facilities producing energy from fossil fuels has consistently declined from yuan 167 billion ($26.9 billion) in 2008 to yuan 95 billion in 2014, while investment in non-fossil-fuel sources has increased from yuan 118 billion in 2008 to yuan 252 billion in 2014.
The share of energy investment going into renewable electric generation has increased steadily from 32 percent in 2007 to 50 percent in 2011 and nearly 60 percent in 2013. Water, wind and solar energy sources now used in China's electric power generation has reached 31 percent of the total, up from 21 percent in 2007.
It is clear that as China moves aggressively into green energy, the future of Indonesian coal exports will be more challenging unless new markets are found for its surplus production.
Over the medium term, if China's growth pattern puts emphasis on consumption-led growth, Indonesia, with its resource-based exports would likely not gain much benefit from increases in Chinese consumption. A few commodities such as palm oil and rubber may be able to hold their export volumes to China because of their growing food and car industries.
A change in China's growth rate could have significant implications for Indonesia. A slowdown in China's growth would impact on Indonesia through both direct trade and commodity price effects. Given the importance of commodity exports to China in recent years, lower commodity earnings could significantly influence a company's investment decisions and possibly Indonesia's aggregate consumption through the income effect.
A slowdown in China would have an impact on Indonesia's major trading partners, adding to export volume effects on Indonesia.
As exports could not be expected to support growth in the medium term, maintaining consumption and reviving investment growth would be the most crucial thing to do for the government in the short term. This is necessary to prevent economic growth from slipping further.
But these would depend on how the authorities play out their monetary and fiscal policies: loosening monetary policies without raising inflationary expectations, or more expansionary fiscal policies without incurring higher deficits.
The writer, a graduate of University of Indonesia's School of Economics, is a commissioner at a publicly listed oil and gas service company. The views expressed are his own.