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Analysis: August foreign trade: No indication of early economic recovery
Oil and gas exports plunged 41 percent year-on-year (yoy) on continued low oil prices as the Indonesia Crude Price (ICP) fell to US$43
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Oil and gas exports plunged 41 percent year-on-year (yoy) on continued low oil prices as the Indonesia Crude Price (ICP) fell to US$43.61 per barrel, down 16 percent month-to-month (mtm) at the end of August. In non-oil and gas exports, the steepest decline stemmed from tin exports, which decreased 99 percent mtm on government efforts to tighten tin trading and illegal mining. The highest increase came from pearls, which rose to $432 million, up 121.75 percent mtm.
Separately, we note that continued rupiah weakness versus the US dollar retained the US as Indonesia's key trading partner, accounting for 11.5 percent of non-oil and gas exports, above China and Japan (Figure 1).
Reflecting lower oil prices, which fell 14.8 percent mtm, Indonesian oil and gas imports dropped 38 percent yoy and 8.1 percent mtm (Bahana: 12 percent mtm) to $2.1 billion, more than our estimate. At this point, we expect continued weak oil prices to keep import levels in check and support our estimate of a 2 percent current account deficit (CAD) for 2015.
Non-oil and gas imports started to accelerate and were up 30.5 percent mtm, compared with a 25.1 percent drop in July this year, although they remained lower at 10.8 percent yoy, versus a 21.4 percent drop in July. Imports increased across the board with capital goods up 23 percent mtm, raw materials higher by 18.6 percent mtm and consumer goods rising by 53 percent mtm, but still allowing for an overall $434 million in August's trade surplus.
Most of the higher imports in August were on the back of machinery and mechanicals at $409 million (up 26.4 percent mtm), electricity equipment at $214.5 million (up 20.4 percent mtm), steel and iron at $181.7 million (up 61.53 percent mtm), plastics at $177.9 million (up 40.3 percent mtm) and artillery at $103.7 million (up 42.31 percent mtm).
While the significant increase in raw materials and capital goods imports might have raised hopes of a demand recovery, annualized growth of capital goods and raw materials imports continued to decline in August, at minus 14.2 percent yoy (Figure 2). We do not see this as an indication of an early economic recovery.
Additionally, a Purchasing Managers Index (PMI) of below 50 also encourages us to tone down our expectations on current challenging economic conditions. On the export side, we expect export exposure to the US to continue to increase along with stronger dollar and US economic recovery.
Recently, the rupiah has continued its depreciation to 14,404 against the US dollar, while the 10-year government bond yield has risen to 9.44 percent (Figure 3), on jitters ahead of the upcoming Federal Open Market Committee (FOMC) announcement.
Recent capital outflows increased concerns on continued negative balance of payments in the third quarter this year. This concern and remaining volatility should result in Bank Indonesia (BI) maintaining its firm stance on a tightening bias at Thursday's governor's meeting. Therefore, we expect the BI rate to remain at 7.5 percent with the overnight deposit facility rate (Fasbi) to also stay at 5.5 percent.
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The writer is an economist at Bahana Securities.
