Thu, 10 Apr 2003

Achieving export recovery

Ari A. Perdana, Centre for Strategic and International Studies (CSIS), Jakarta,

Before the aggression in Iraq, Indonesia's foreign trade indicators raised some hopes of a recovery. Total exports in 2002 were US$57 billion, 1.2 percent higher than those in 2001. Export growth was driven mainly by non-oil and gas exports, which grew by 2.8 percent, offsetting the decline in oil and gas exports. Exports improved in the second half of last year. In the first half, export growth was still negative. Export growth continued into early 2003, reaching almost $10 billion in the first two months. In comparison, exports in the same period last year were only $8.2 billion.

Import performance has also supported prospects for export recovery. In January and February of this year, imports increased by 37 percent compared with the same period last year. Classified by type of goods, the highest increase was in raw materials and intermediate goods (43 percent), followed by capital goods (22 percent). Last year, growth in the importation of capital goods was still negative, while raw materials and intermediate goods imports started to grow slightly, by 1.5 percent. An increase in imports in these two goods classifications usually indicates a recovery in domestic production activity, which should lead to further export growth.

War in Iraq disrupted the optimism. Tensions in the region have hurt the country's exports to the Middle East. Some domestic producers have reported the cancellation of orders from elsewhere in the world, due to increased transportation costs and growing security concerns.

While resolution of the war is still uncertain, the recent SARS epidemic is another blow to the economy. The direct impact of the hysteria created by SARS is disruption to the mobility of goods, services and human resources in the countries affected. From the Indonesian point of view, exports to the troubled countries will be affected, as there will be reduced transportation for Indonesian goods. The countries most affected by SARS, China (including Hong Kong), Singapore and Taiwan, are among the top ten destinations for Indonesian exports. Non-oil and gas export to the countries in 2002 were valued at $8 billion, or 18 percent of total non-oil and gas exports. Exports to other countries or regions may be affected if Indonesia is also perceived to be an affected country.

Besides exports, SARS could potentially reduce imports from the affected countries. As well as major export destinations, China, Singapore and Taiwan are also Indonesia's main sources of imported goods. The value of imports from the three countries in 2002 was $5 billion. That is 20 percent of total non-oil and gas imports. Since the majority of imports from the three countries are raw materials, intermediate and capital goods, declining imports could hurt domestic industries. This is because domestic production activities still depends on the supply of imported goods.

The SARS epidemic, together with war in Iraq, has significantly hurt the tourism sector. This is indicated by a decline in the number of incoming tourists and by flight cancellations. Fortunately, so far, the SARS epidemic has yet to be a significant blow for exports and imports. It has not been proven that the goods traded are a medium of transfer for the virus.

However, the government and domestic business players must anticipate the negative impact of this recent hysteria. It is also important to remember that, even without the SARS epidemic, there are some points to note regarding the export performance shown by the statistics.

First, the export growth during the first months of this year has been driven by oil and gas exports. Such exports, which account for only a quarter of Indonesia's total exports, grew by 46 percent. More specifically, the growth was mainly due to higher world oil prices, following the earlier uncertainty regarding the war. Meanwhile, non-oil and gas exports, which account for 75 percent of total exports, grew only by 11 percent.

Second, the performance of leading export commodities is still weak. Manufactured products, contributing 68 percent of total exports, grew by only 2.2 percent last year. Exports of leading manufactured commodities, such as machinery and electrical products, grew by only 1 percent. Non-knitted clothing even declined by 12 percent, while knitted products declined by 17 percent.

Another point concerning prospects for this year's export recovery is the global economic situation. Demands for Indonesian commodities depend on the economic performance of the destination countries. The two largest markets for Indonesian products are Japan and the U.S. Combined, the market in both countries absorbs almost half of all Indonesian exports, or about 40 percent of non-oil and gas exports. The problem is that both countries still face possible recession, and this year's performance will depend on the outcome of war in Iraq. The third-largest market for Indonesian product is Singapore, whose economy is also in decline.

There are several anticipatory measures that can be taken to maintain the momentum of export recovery. First, the government and business sector should try to promote several non-leading commodities that have been growing for the past few quarters. For example, exports of animal and vegetable fats and oils, which account for only 6 percent of total exports, grew by 80 percent last year.

Second, we should also promote exports to nontraditional markets, as alternatives to compensate for traditional destinations declining due to recession, war and SARS. Take South Korea, for example. Last year, exports to the country increased by US$95 million (18 percent), the highest increase among Indonesian trading partners. Other alternatives are the promotion of trade with member countries of the Association of Southeast Asian Nations (ASEAN), using the momentum of the ASEAN Free Trade Area.

To complement the strategy for export promotion, the economic players should also exploit domestic market potential. It would take more space to discuss the potential role of the domestic market in supporting economic recovery. But the discussion over this has already commenced, and the initiative should be promoted further.