Data published by Statistics Indonesia (BPS) on Wednesday show that the country’s trade surplus plummeted 61 percent to US$2.9 billion in May, down from the all-time high of $7.56 billion reached in April.

Both exports and imports dropped, decreasing 21 percent month-to-month (mtm) to $21.51 billion and 5 percent mtm to $18.61 billion, respectively.

However, Indonesia's trade surplus was still up 7.4 percent when compared with May 2020.

Exports and imports increased 27 percent and 30.74 percent, respectively, over the past year.

May's trade surplus was lower than predicted by economists of state-owned Bank Mandiri, who had expected that exports would exceed imports by $5.01 billion, while the market consensus according to a Bank Mandiri survey was for a surplus of $3.46 billion.

Even though imports did not increase as fast as the 38.92 percent yoy rise forecast by the Mandiri economists, the surplus was smaller than expected because exports grew much less than the 46.35 percent yoy projected by the bank.

"The largest decline in imports occurred in [the category of] machinery and electronic equipment, which decreased by $254.9 million or 11.16 percent [mtm]," BPS distribution and services deputy Setianto said.

Overall, capital goods, which include machinery and electronic equipment, dropped by 3.62 percent mtm to $2.44 billion, while raw material imports fell 5.62 percent mtm to $14.66 billion.

Imports of consumer goods also declined on a monthly basis, dropping 10.77 percent to $1.52 billion, due largely to a decline in vegetable and fruit imports. Imports of oil and natural gas declined 12 percent over the month to $3.35 billion.

Annually, all imports were up, with raw materials rising 33.95 percent, followed by capital goods and consumer goods, up 29.18 and 7.83 percent yoy, respectively. Oil and natural gas imports increased 62.64 percent yoy.

"In terms of countries, imports decreased largely from Singapore, China and Hong Kong," Setianto continued.

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The segment contributing most to the monthly plunge in exports was manufacturing, where exports dropped 25.93 percent to $14.14 billion due to the ban on crude palm oil (CPO) exports, which declined by a stunning $2.14 billion or 71.79 percent.

"Palm oil exports [from] the province of Riau […] fell 91.57 percent, down by $916.4 million," Setianto noted.

Next were agriculture and mining, which decreased by a monthly 25.92 percent to $290 million and 12.92 percent to $5.58 billion, respectively.

Oil and natural gas was the only category that recorded a monthly increase, rising 4.38 percent to $1.5 billion, with crude oil being the top riser in this category.

Annually, all categories booked a rise, led by the mining sector’s 114.2 percent yoy increase and followed by oil and gas with a 54.49 percent yoy rise. Agriculture and manufacturing come next, rising 20.32 and 7.78 percent yoy, respectively.

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Centre for Strategic and International Studies (CSIS) economics department head Fajar Hirawan predicted that the drop in machinery and electronics imports would also be reflected in Indonesia's manufacturing purchasing managers' index (PMI).

In May, business intelligence firm IHS Markit, a subsidiary of S&P Global, reported a 1.1 point drop in Indonesia's manufacturing PMI to a reading of 50.8, reflecting a worsening assessment of business prospects by purchasing managers in the country due to supply constraints and concerns about future orders.

"The government must be more careful, so that populist anti-import policies do not hamper production in the processing industry," Fajar said in a message to The Jakarta Post on Wednesday.

He added that the drop in raw material imports could signify weaken investment, particularly in the manufacturing sector.

"If there is [disruption] in the import of raw materials, that could disrupt the investment performance as indicated by the fixed capital formation goods indicator. Given its sizable contribution of around 30 percent to GDP, the economy would be affected," Fajar explained.

Center of Economic and Law Studies (CELIOS) director Bhima Yudhistira predicted a drop in the manufacturing PMI in the next two to three months, arguing that the drop in machinery imports showed that industry, notably the textile sector, had not yet fully recovered.

He also predicted that the GDP contribution of gross fixed capital formation could drop below 30 percent this year, as low demand for capital goods could mean that businesses were holding back on expansion plans.

“If the cost of funds rises in the future due to rising interest rates, which includes the [United States] Federal Reserve’s federal funds rate, this will put businesses in a dilemma between expansion using loans with high interest rates or delaying expansion, [so] direct investment in the country might also decline,” Bhima told the Post.

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