Achieving export recovery

Achieving export recovery

Ari A. Perdana, Centre for Strategic and International Studies
(CSIS), Jakarta, Ari_Perdana@csis.or.id

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.