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Analysis: The effect of commodity price changes on Sumatra and Kalimantan
Commodity prices have continued to decline over the last five years
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Commodity prices have continued to decline over the last five years. Crude palm oil decreased to US$551 per metric ton in August, 2015 from $1083 per metric ton in the same month of 2011, while coal dropped to $58.04 per metric ton from $120.13 and Brent crude oil fell to $46.99 per barrel over a five-year period. The decline in global commodity prices has severely affected the economies of commodity-producing countries, including Indonesia.
Data published by the Central Statistics Agency (BPS) clearly indicates that the decline in global commodity prices has affected the growth of the agricultural and mining sectors. During the first half of 2015, the agricultural sector recorded growth of 5.5 percent year-on-year (yoy), lower than the 9.7 percent recorded in the same period of last year. The worse performing sector was mining and quarrying which contracted by 3.6 percent yoy, while in the first half of 2014, it dropped slightly by 0.43 percent.
The decline in global commodity prices has impacted regions whose economies rely on commodities such as provinces in Sumatera and Kalimantan. In the first half of 2015, economic growth in Kalimantan and Sumatra grew only 1.59 percent and 3.20 percent yoy respectively.
Based on our observations, slow growth is found in commodity-based provinces, especially those producing oil, gas and coal. Provinces that suffered from negative growth in the first half of 2015 were Aceh, Riau and East Kalimantan. The mining-and-quarrying sector dominated the economies of Riau and East Kalimantan with a respective share of 31.06 percent and 43.89 percent. Their contribution, together with the oil-and-gas based manufacturing sector, to Aceh's economy was about 13.6 percent. Growth, however, dropped by 26.87 percent.
Effects on Sumatran economy
Economic growth in Sumatra during the first half of 2015 declined to 3.2 percent yoy, down from 5.19 percent in the same period of last year and lower than the national figure of 4.7 percent yoy. A contraction in the mining sector and a slowdown in the agricultural sector triggered this slump. The mining sector in Sumatra grew by -3.66 percent and -2.62 percent yoy in the first and second quarter of 2015. The agricultural sector, meanwhile, grew by 5.69 percent and 2.29 percent yoy in the same period.
The fall in the global price of commodities such as crude oil, palm oil, coal and rubber, was largely behind the poor peformance of these two sectors. The fall also adversely affected export performance.
The slowdown in economic growth in Sumatra in the first half of 2015 occurred in all of the region's provinces except Riau Islands, whose economy was driven mainly by manufacturing industries, rather than the commodity sector.
Meanwhile, provinces in Sumatera which experienced a growth contraction in the first half of 2015 were Aceh and Riau (-1.9 percent yoy and -1.4 percent yoy respectively). The shrinking of these economies can be ascribed to the contraction in the growth of the mining sector and the slowdown in the performance of the agricultural sector.
Potential sectors in Sumatra
Fluctuations in commodity prices have a relatively significant impact on the mining sector. Falling prices of mined products have led to a contraction in the mining sector in Sumatra. Meanwhile, fluctuations in commodity prices have resulted in slower growth in the agricultural sector.
The next question that arises is which sectors in Sumatra still have the potential for growth? The mapping of economic sectors during the first half of 2015 shows that those sectors that are not directly related to commodities, such as the non-oil-and-gas manufacturing industry, trade, transportation and warehousing and construction sectors, retain the potential for high growth.
In addition, an increase in the realization of government infrastructure projects is expected to spur on economic performance in Sumatra. Large-scale infrastructure projects in Sumatra such as the construction of the Trans-Sumatran highway and double-track railways should also serve to improve the economic performance in the region.
Effects on the Kalimantan economy
Similar to Sumatra, the decline in commodity prices has also affected the performance of Kalimantan's economy. In the first half of 2015, Kalimantan grew by 1.59 percent yoy, which is just half of its recorded growth in the same period in 2014.
Contractions in the mining and manufacturing sectors caused the decline in economic growth in Kalimantan. The region's mining sector in the first and second quarters of 2015 contracted 0.51 percent and 2.61 percent yoy, respectively. The manufacturing sector also contracted 3.05 percent and 0.63 percent yoy, respectively, in these quarters. The decrease in coal prices and the decline of oil production brought about the contraction of these two sectors, which were subsequently depressed in their export performances.
The slowdown in economic growth in Kalimantan in the first half of 2015 afflicted all the region's provinces except for Central Kalimantan, which enjoyed an increase in the production of palm oil production and rubber in the second quarter of 2015. The other provinces were not as fortunate however, especially East Kalimantan which suffered a contraction in growth of 0.28 percent yoy in the first half of 2015.
Potential sectors in Kalimantan
The mapping of economic sectors in Kalimantan during the first half of 2015 shows that business sectors that are not directly related to commodities have the potential for high growth. These include the construction, government administration, and transportation and warehousing sectors.
The construction sector in Kalimantan has significant potential as it will benefit from the increased realization of government infrastructure projects in the area.
It is also anticipated that several large-scale infrastructure project activities in the region such as the construction of an airport in Tarakan and the development of the Asam-Asam steam power plant will enhance the economic growth performance in the area.
Our analysis has revealed that commodity-based provinces should find new sources of economic growth in the future. The main reason is simply that the commodity boom is over, implying that they can't rely on commodity-based development anymore. One of the alternatives is to promote resources-based industries such as manufacturing and adding the value of goods that have been produced in the regions.
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The writer is a regional analyst at PT Bank Mandiri (Persero) Tbk.
