The current weakness of Indonesia’s economy is weighing on state finances, as the manufacturing and trading sectors — the primary contributors to tax income — recorded negative growth in the first 10 months of this year.

Business players have confirmed that economic activity weakened throughout this year compared with last year, which in turn has impacted state coffers.

Indonesian Footwear Association (Aprisindo) chairman Eddy Widjanarko said domestic footwear sales had dropped this year while labor costs had increased, particularly in Tangerang, Banten, one of the industry’s production centers in the country.

The recent increase in the minimum wage in Tangerang had forced around 20 shoe factories to relocate to Central Java, and more were expected to follow suit by the end of this year, said Eddy.

“Many factories in Banten have relocated to Central Java, while we are still in the phase of training the workforce there,” Eddy told The Jakarta Post over the phone on Tuesday.

Eddy, however, said exports to the United States had surged by around 11 percent this year amid the ongoing trade war between China and the US, which has forced global supply chain adjustments around the world.

Despite the rise in shoe exports to the US, overall exports of footwear from January through September dropped to US$3.25 billion, down 12.86 percent from the same period last year, according to Trade Ministry data.

The hidden blessing of the trade war, however, comes with a curse, as Eddy said the US had to dump its semifinished shoe products on Indonesia because of higher import tariffs to China, putting further pressure on local producers.

The pressure in the local footwear industry was also reflected in the broader manufacturing sector and further squeezed tax revenue from the sector.

The manufacturing sector, which accounted for around a third of total tax revenue, saw its year-on-year (yoy) tax contribution fall by 3.5 percent to Rp 277.33 trillion (US$19.68 billion). The drop stands in stark contrast to 12.3 percent yoy growth recorded over the same period last year.

Indonesia’s Purchasing Managers’ Index (PMI) slumped to 47.7 in October from 49.1 in the previous month, marking the sharpest decline of the indicator in nearly four years, IHS Markit data showed. A PMI score below 50 indicates that the manufacturing industry is contracting, while a score above 50 signals growth.

Tax receipts from the trading sector, which is the second-largest tax revenue contributor after the manufacturing sector, grew only 2.5 percent over the same period — in contrast to 25 percent growth in the first 10 months of 2018 — to Rp 197.47 trillion.

Indonesian Chamber of Commerce and Industry (Kadin) vice-chairman of trade affairs Benny Soetrisno said the decline in tax receipts from trade could indicate two factors, either the sector faced increasingly stiff competition from online marketplaces that eat up profits from the conventional trading sector or it signals a decline in people’s purchasing power.

“Online trade is getting an increasing slice of the pie in the trading sector. If online trade is already taxed [similarly to conventional purchases], then [the decline in tax receipts from the trade industry] is caused by lower purchasing power,” said Benny.

Bahana Sekuritas economist Satria Sambijantoro wrote in a research note that the latest revenue data highlighted the impact of the global environment on the domestic economy.

“The latest budget [data] is an example of how the global economic slowdown hits emerging economies with a ‘twin deficit’ through the current account balance from falling exports and the fiscal balance from weakening tax revenues,” Satria wrote.

Overall tax revenue this year has reached at Rp 1.01 quadrillion as of October, 65 percent of the target stated in the state budget. The latest figure represents a 0.23 percent yoy increase compared to the first 10 months of 2018.

Despite the sluggish outlook, Finance Minister Sri Mulyani Indrawati said the glass was half full, as tax collection had shown signs of early recovery in October.

“We are monitoring tax revenue on a monthly basis. Some [types of taxes] recorded a turning point [in revenue growth],” said Sri Mulyani in Jakarta on Monday.

Corporate income tax, which accounted for 18.9 percent of total tax revenue, grew 8.54 percent yoy in October, while employee income tax (PPh 21) grew 10.42 percent. Revenue from both types of tax had contracted in the third quarter.