As part of its strategy of boosting non-oil exports to new markets, the government is seeking to expand the availability of trade finance for its exporters, particularly small and medium-sized enterprises (SMEs). “If we want to prevent the ongoing volatility from disrupting our export growth, then we should not focus on exporting goods only to the US and China; we must diversify our exports,” the minister of finance, M. Chatib Basri, told a Jakarta seminar on trade finance in September 2013. While exports to non-traditional markets in Africa, the Middle East, Latin America and Central Asia grew from $18bn to $24.6bn between 2008 and 2012, this growth has not offset weaknesses in the EU, US and China, and some 63% of exports remain commodities. Indeed, given the global correction in commodity prices, Indonesia’s trade with unconventional markets dropped 3.63% in value in the first half of 2013, according to data from the Ministry of Trade. Growing government involvement in trade finance should facilitate access to international markets for smaller exporters.
Bank Finance
Tight global credit markets in the aftermath of the 2008-09 financial crisis have prompted European banks in particular to deleverage their Asian trade finance operations. Traditionally dominant French banks like BNP Paribas and Société Générale have had to repatriate capital onshore Europe to cover their positions, leaving space for other banks, including Asian and regional banks, to expand their presence in Indonesian trade finance. While major global banks like HSBC, Citi, Standard Chartered and Deutsche Bank are very active in Indonesia, their books remain weighted toward export financing in a roughly 60:40 split to imports. Domestic banks like Mandiri and BNI play a more significant role in imports, with roughly two-thirds to three-quarters of their books on import financing, although they have been expanding export funding for non-traditional markets such as African and ASEAN in particular. BNI, ranked as Indonesia’s best trade finance bank by the Asian Banker awards, has invested Rp100bn ($10m) in upgrading its trade finance platform to cater to more regional development banks and expects to boost trade finance volumes by 15% to 20% in 2013, to $25bn-26bn. While the availability of US dollar liquidity has tightened significantly since May 2013, with exporters hoarding foreign exchange to benefit from the rupiah’s 17% devaluation in the first three quarters of 2013, Indonesian banks have closely matched their currency positions, with the industry’s average net-open position (the currency mismatch in their balance sheets) at only 2% in September 2013, according to Fitch.
Government Support
While larger exporters can easily access banks’ trade finance facilities, the government provides additional trade support covering areas from which conventional banks traditionally shy away.
While foreign export-import (EXIM) banks from the US, Japan, Korea, China and others finance some Indonesian imports from their home countries, the government has been expanding support for the country’s exporters. The state-owned Asuransi Ekspor Indonesia (ASEI), established in 1985, provides export insurance for non-hydrocarbons trade covering commercial and political risks. The body covers up to 85% of losses and has achieved consistent growth, albeit from a low base, in recent years: its assets grew 34.77% year-on-year (y-o-y) to Rp1.3trn ($130m) in 2012, while its profit grew 36.78% to Rp92.8bn ($9.3m). Yet export credit insurance premiums accounted for only 5% of ASEI’s total premiums at the close of 2012, even if this total expanded rapidly from Rp7.8bn ($780,000) in 2008 to 40bn ($4m) by 2012. The Indonesian EXIM Bank (IXMB), which replaced Bank Ekspor Indonesia in 2009 and has Rp4trn ($400m) in capital, provides pre- and post-shipment trade finance to clients in key sectors like palm oil, hydrocarbons, mining and textiles, although it aims to expand support for rubber, cocoa, coffee, fisheries and other key exports. IXMB is also expanding its financing of infrastructure-related trade, in support of the government’s Masterplan for Acceleration and Expansion of Indonesia’s Economic Development. In total, it disbursed Rp32.1trn ($3.2bn) in trade finance and export guarantees in the four years to September 2013, generally at lower interest rates than the commercial banks. In the first three quarters of 2013 the bank reported roughly half of its financing to manufacturing, while the other half was spread across logistics, warehousing, plantations and mining. Trade support remains highly concentrated amongst larger corporates, however, which accounted for 91.28% of IXMB’s Rp27trn ($2.7bn) in lending in 2012, while SMEs accounted for 8.72%.
The bank expects to expand lending by 30% in 2013, while its trade finance book (including letters of credit) is forecast to expand by 60%, according to a statement by the bank’s CEO in July 2013. It already achieved a 32.5% y-o-y rise in financing in the first half of 2013.
Expanding Role
While lending has remained driven by larger corporates, the geographical spread of IXMB’s financing has broadened considerably, with trade finance with non-traditional markets accounting for 23.37% of all lending in 2012. This reflects growing government efforts to support exports to non-traditional markets, with IXMB targeting new markets in Africa, the Middle East, Latin America, Central Asia and Eastern Europe. In 2012 the bank said it provided trade finance facilities to exporters to 14 new markets such as Algeria, Ghana, Taiwan, the UAE and Lebanon. In early 2013 the government expanded IXMB’s role to match that of larger EXIM banks worldwide, by allowing the bank to finance importers in target countries rather than just Indonesian exporters. This expanded support allows Indonesian exporters to narrow the price differential when selling to non-traditional markets. “Due to higher risk, our businesses have to charge a higher price when they sell in such countries,” Isnen Sutopo, a director at IXMB, told the Jakarta Globein October 2013. “Other countries cover these risks, allowing their product to be sold at lower prices.” The bank thus co-financed contractors on foreign projects like the King Abdullah Financial District in Riyadh and gas pipelines in Malaysia, Azerbaijan and Timor Leste. It has also provided financing for the construction of smelters in Indonesia: $65m for Indoferro’s iron smelter in Cilegon and $25m for Sulawesi Mining Investment’s nickel smelter. To fund the expansion in its dollar-denominated trade finance book, IXMB has turned to international bond markets and private placements. Following its $500m five-year Eurobond debut in April 2012, the bank raised a $500m, three-year syndicated loan through the Bank of Tokyo Mitsubishi UFJ and other partners in May 2013. IXMB said it is looking to add another $120m in 2014. This funding comes on top of bilateral agreements with other EXIM banks: a $100m loan from Japanese sources in 2012, including $60m from Japan’s Bank for International Cooperation and $40m from Sumitomo Mitsui Banking Corporation.
Initial Impact
While trade with non-traditional markets has been growing apace, these increases are from a low base. “Indonesia’s export diversification efforts have started to bear results,” the International Institute for Sustainable Development (IISD), a Canada-based NGO, noted in a December 2012 report on Indonesian trade policy. Exports to Pakistan grew 22%, to Myanmar by 56%, to South Africa and Colombia by over 100% and to Brunei Darussalam by a record 222.4% in 2012, Indonesia’s top 10 export markets still accounted for 73.6% of total exports in the first half of 2013, up from 69.7% in 2012, according to the Ministry of Trade. While a slowdown in demand from key markets and a global commodity price downturn have weighed on the value of exports, efforts to expand Indonesia’s trade with new markets face competition from other key Asian exporters. “While we are seeking to diversify our exports to new markets, such as in Africa and Latin America, through greater government support for trade finance, this will take time and we will compete with other emerging economies like China and India as they seek to do the same,” Luky Alfirman, head of the Ministry of Finance’s centre for macroeconomic policy, told OBG.
As investment in Indonesia’s non-commodity sectors continues to grow, the authorities will need to expand access to credit and export finance for its SMEs – key to reducing Indonesia’s reliance on commodity exports, which have preserved stable trading patterns. New trade agreements will be important to integrating Indonesia into global trade and expanding exports, but support from financial institutions and government leadership will be critical to leveraging opportunities.
Greater support for trade finance will be needed in trade policy as well, however. “The focus shall be to develop a long-term strategy for export development into these markets by looking at current and future export opportunities and complementarities in product and resource endowments and core competencies,” Canada’s IISD noted in its report in December 2012.
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