Economic Update

22 Feb, 2018

After achieving a foreign trade surplus last year on the back of strong demand for minerals and agricultural products, Indonesia is looking to sustain growth by building ties with new markets, as well as deepening relationships with existing partners.

For the third consecutive year Indonesia closed out 2017 with a trade surplus, posting a five-year high of $11.8bn, according to data issued by Statistics Indonesia.

Exports by value increased by 16.2% over the course of the year to $168.7bn, driven by strong growth in mining exports and related products, which jumped 33.7%, and supported by non-hydrocarbons products (13.1%) and agricultural exports (7.8%).

The performance helped offset a 15.7% increase in imports to $156.9bn, with capital goods imports rising by 12.1%, and inbound shipments of raw materials and auxiliaries up 16.6%.

Expanding into Latin America markets

Although the greatest proportion of foreign trade is conducted with a small number of key regional partners – China and Japan account for more than a third of non-oil imports and around a quarter of exports – Indonesia is seeking to broaden its trade net.

In her annual foreign policy statement given in early January, Retno Marsudi, the minister for foreign affairs, announced that the government was focusing efforts on increasing trade with countries in Latin America, in addition to improving existing ties with partners in Africa, and Central and Southern Asia.

Marsudi said that during the past year bilateral consultations and joint commission meetings had been carried out with Mexico, Peru, Argentina and Ecuador, as well as Jamaica and Costa Rica in the Caribbean. “These regions remain unchartered territories for Indonesia’s products and businesspeople,” she said.

Chile agreement signals shift in trade flows

In line with the increased focus on Latin America, the government signed a Comprehensive Economic Partnership Agreement (CEPA) with Chile in December, the first such deal with a country from the region.

The agreement will see Chile remove or significantly reduce tariffs in a wide range of areas, including automotive, furniture, palm oil, textiles and fisheries products. In addition to providing Indonesian businesses with access to the Chilean market, the deal will help the country develop a regional presence by exposing other markets to Indonesian products through Chile’s trade agreements with neighbouring countries.

The CEPA will similarly provide Chilean exporters with a landing pad in South-east Asia, with officials from both countries hoping to add to the $226m in trade recorded between the countries in 2016.

Building on the Chilean agreement, the government is conducting negotiations with Peru for a similar deal, which is expected to be finalised this year.

Talks continue with traditional partners

While seeking to break into the Latin American market, Indonesia is also working to boost ties with long-standing trade partners, and is set to begin another round of negotiations to finalise a CEPA with the EU in February.

While the agreement is projected to be concluded next year and implemented by 2021, talks could potentially be complicated by EU plans to ban the use of palm oil in motor fuels by 2021.

As the world’s second-largest exporter of palm oil, behind Malaysia, Indonesia’s export potential would be significantly altered by such a ban, and Indonesian officials have voiced concerns over the issue.

Australia is another key partner with which Indonesia hopes to secure a bilateral trade deal. Despite failing to meet a year-end 2017 deadline to reach an agreement, talks between the two countries are expected to continue in 2018.

Business community pushes for diversified trade

The push to diversify and strengthen the trade portfolio has been welcomed by the business community, which has previously raised concerns of potential overdependence on existing trade partners.

According to the latest OBG Business Barometer: Indonesia CEO Survey, released in late January, 38% of respondents said demand growth in China – Indonesia’s main trading partner – was the top external event that could affect the economy in the short to medium term. This comes amid speculation of a possible slowdown in Chinese demand for hydrocarbons, minerals or palm oil.

Another 23% of CEOs cited trade protectionism as their major concern, which aligns with the government’s decision to pursue a more expansive trade policy.