Bahana Macrosight: Memoirs of a commodity boom

Summary:

·         December exports and imports powered ahead of consensus

·         Indonesia’s FY20 trade surplus at USD21.7bn, highest since 2011

Exports powered ahead on strong external demand

While Indonesia’s USD2.1bn trade surplus in December 2020 was below consensus expectations of a USD2.6bn surplus, the data were more upbeat than at first glance. Exports surged 8.39% m-m and 14.6% y-y (consensus: 6.2% y-y) to hit USD16.54bn, the highest since December 2013 (USD16.97bn). The positive reading was supported by a jump in shipments to China (+30.2% y-y), with the Mainland aiming to boost domestic production and targeted imports to hit USD22tn in the next decade. Uptick in commodity prices helped boost the exports of crude palm oil (29.9% y-y), coal (17.6%) and nickel (21.8%). Exports to the US and India were also strong in December, respectively surging by USD265.9mn and USD254.6mn compared to the previous month. For the manufacturing sector, Indonesia also recorded strong growth of exports for electrical machineries (HS85) that rose USD110.1mn m-m and unknitted clothing (HS62) up USD80.8mn m-m. Throughout 2020, exports recorded -2.61% growth to hit USD163.3bn, a somewhat resilient figure amid the Covid-19 pandemic.

Imports rebounded as capital goods improved

Imports recorded growth of 14% m-m and -0.5% y-y (consensus: -12.9% y-y) to hit USD14.4bn. Improvement was particularly evident on consumption goods that stood at USD1.72bn (31.9% m-m/3.9% y-y), largely contributed by garlic, cooling-machines and fruit imports from China. However, the key highlight here is the rebound in imports of raw materials that topped USD10.19bn (14.15% m-m and -2.02% y-y) and capital goods that hit USD2.53bn (3.89% m-m and 3.17% y-y). The December imports were boosted by purchase of mechanical-electrical machinery/HS84-85 (USD442mn increase compared to November), mineral fuels/HS27 (USD102mn) and iron & steel/ HS72 (USD93mn). Imports of vaccines stood at USD40mn in the last two months of 2020, with USD27.1mn in December and USD13.7mn in November, mostly from China but also from other countries such as Europe. The imports of vaccines may rise in the upcoming months, with the Sinovac vaccine complemented by Western vaccines such as those of AstraZeneca and Pfizer, whose orders have been confirmed by the Indonesian government.

Trade surplus can be sustained in 2021

Cumulatively in 2020, exports exceeded imports by USD21.7bn, or the highest annual trade surplus since 2011 (USD26.1bn) during the commodity boom. Our view here is the current commodity cycle has not peaked yet: demand for goods will continue to rise as more economies around the world reopen their economies, while inventory levels for major commodities will continue to be pushed below pre-Covid levels. The uptick in commodity prices would consequently engender a positive feedback loop as purchasing power improves, thus accelerating the recovery in both consumption and investment while boosting tax revenues that could support the fiscal balance. Our base-case scenario here is for Indonesia to record at least USD10bn of trade surplus for FY21, as the uptick in commodity prices should suffice to offset the rebound in imports of capital goods and raw materials.