Anticipating Decline in Indonesia's Export Performance

The cost of living crisis indicates weakening global purchasing power and has the potential to reduce Indonesian exports. However, there is still a chance to halt the decline in exports.

KOMPAS/AGUS SUSANTO (AGS)

Container loading and unloading activities at Tanjung Priok Port, North Jakarta, Thursday (23/9/2021).

JAKARTA, KOMPAS — The global cost of living crisis could cause a decline in Indonesia's export performance. This could happen because buying power has fallen in countries around the world, especially in Indonesia's main export destinations.

A survey that French multinational market research and consulting firm Ipsos conducted for the World Economic Forum (WEF) showed that one in four people in developed countries were experiencing financial difficulties. They had to cut their food, electricity and heating costs. They also reduced social activities in cafes and restaurants and delayed buying decisions for high-value items.

The industry and regional research head at state-owned Bank Mandiri, Dendi Ramdani, said on Tuesday that the cost of living crisis reflected declining growth in a country. The crisis had reduced buying power, so demand fell.

The United States, for example, saw its growth contract 2.6 percent year-on-year during the global financial crisis in 2009. At that time, US imports fell at an annual rate of 26 percent, and also affected Indonesian exports to shrink at an annual rate of 15 percent.

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“In the second quarter of 2022, the US economy shrank at an annual rate of 0.9 percent, so imports are estimated to have contracted by 9 percent. This could lead to a decline in Indonesia's exports to that country," said Dendi.

The US was currently experiencing a recession after its economy suffered a contraction over two consecutive quarters. The US economy unexpectedly shrank at an annual rate of 1.4 percent in the first three months of 2022, and then at an annual rate of 0.9 percent in the second quarter.

According to Dendi, the decline in demand would cause a decline in global commodity prices and lead to a contractionary monetary policy. This could also effect a decline in Indonesia's export value.

With a decline in global commodity prices, Indonesia would no longer enjoy a windfall from its commodity exports. Meanwhile, contractionary monetary policies, such as increasing the benchmark interest rate, would further depress commodity prices.

When people's buying power decreases, consumption patterns will definitely change.

“Commodity prices will continue to fall as contractionary monetary policy suppresses economic growth, which in turn reduces global demand. Contractionary monetary policy will also make the US dollar stronger. In turn, this will make imports more expensive, as transactions are made in US dollars. As an impact, demand will drop,” he said.

The head of the Trade Ministry’s Trade Policy Agency (BKP), Kasan Muhri, shares this view. The cost of living crisis is one indicator of weakening buying power around the world, which will reduce both demand and exports.

“When people's buying power decreases, consumption patterns will definitely change. It could fall drastically or it could be adjusted by consuming similar products that are cheaper," he said.

ADITYA PUTRA PERDANA

Drivers of a container truck containing agricultural export products signal at the Merdeka Exports activity at Tanjung Emas Port, Semarang, Central Java, Saturday (14/8/2021). From this port, a number of agricultural products are exported, including swallow nests, porang, nutmeg, coffee, edamame, and green beans, totaling Rp 400 billion..

Still a chance

Kasan acknowledged that the global community would be more selective in whether to buy domestic or foreign products, and would prioritize primary rather than secondary products.

This meant that Indonesia still had an opportunity to prevent a drastic fall in exports amidst the global cost of living crisis. Indonesia could export primary commodities that consumers need, or even industrial raw materials needed in countries that were experiencing crisis.

In addition, Kasan said, Indonesia could benefit from the appreciation of the US dollar against the rupiah. Importers in developed countries, especially the US, could buy Indonesian products at lower prices due to the depreciating exchange rate of the Indonesian rupiah against the US dollar.

“On the other hand, for importers and exporters in Indonesia, this situation will actually lead to higher export and import costs. This needs to be observed and monitored because it will erode the foreign exchange reserves and increase the price of imported products in Indonesia,” he said.

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According to Kasan, the BKP would review the policies related to the exportation of primary and secondary products to anticipate the decline in exports. Exports to countries with relatively good economic growth, such as in the Middle East, Central Asia, and Southeast Asia, would also be encouraged.

The Trade Ministry is targeting Indonesia's non-oil and gas exports to grow 5.2 percent this year. In January-August 2022, growth in Indonesia's non-oil and gas exports exceeded the 35.24 percent target.

According to the latest data published by Statistics Indonesia (BPS), Indonesian exports from January to August 2022 totaled US$194.6 billion, an increase of 35.42 percent compared to the same period in 2021. Meanwhile, non-oil and gas exports reached $183.73 billion, an increase of 35.24 percent.

In its Paying The Price of War report released on 26 Sept. 2022, the Organisation for Economic Co-operation and Development (OECD) stated that Covid-19 and the Russia-Ukraine war continued to increase inflation and pressure global economic growth. The OECD estimated that the world economy would slow in 2022 and 2023 to 3 percent and 2.2 percent, respectively.

The OECD has estimated that the economy will grow 5 percent in 2022 and 4.8 percent in 2023.

US and European economic growth would respectively slow by 0.5 percent and 0.25 percent. The Chinese economy would slow to 3.2 percent in 2022. The three countries are Indonesia's main export markets.

The OECD also estimated that, although still high, inflation in most G20 countries would gradually recede through to 2023 as a result of monetary tightening policies. Average inflation in G20 countries would decline from 8.2 percent in 2022 to 6.6 percent in 2023. In developed countries, average inflation would decline from 6.2 percent in 2022 to 4 percent in 2023.

As for Indonesia, the OECD has estimated that the economy will grow 5 percent in 2022 and 4.8 percent in 2023.

This article was translated by Hendarsyah Tarmizi.