ECONOMIC UPDATE - External trade review - Deficit kicks off the year



Deficit again in the beginning of year 

According to Indonesia Statistic Office (BPS), the country had always recorded trade deficit in every January within the last three years. As for Jan-20, it came at USD864 mn which was bigger than our and consensus’ estimate at USD782.6 mn and USD375 mn, respectively. It narrowed by 23.1% YoY compared to Jan-19 deficit of USD1.1 bn.  Both of export and import showed negative growth where the export decline at 3.7% YoY and the import contracted more by 4.8% YoY. Initially, the hope lurked that the trade performance will get better. It got better due to the phase one trade deal has been agreed, indeed. However, unexpected shock came from China with corona virus outbreak, which is named as COVID-19 that weakens their economy including our trade performance towards China. 


COVID-19 as the bombshell of export

On overall export, the oil and gas (OG) sector export contracted by 41% MoM. The overall non-OG sector export slipped as well by 9.2% MoM where the main laggards were from ores, slag and ash India, China, Pakistan (-75.8% MoM to USD284.7 mn),  animal and vegetables fats and oils China, India and Malaysia (-65.6% MoM to USD127.5 mn) and  fish and crustaceans (-36.5% to USD84 mn).  China leads when it comes to import Indonesia’s animal and vegetables fats and oil commodity, alongside with India and Malaysia. For ores, slag and ash, the top importers are India, China and Pakistan. For the fish and crustaceans, the top importers are US, China and Japan. Down on one’s luck, due to the COVID-19, BPS stated that the export to China fall by 12,07% YoY to USD2,24 bn meanwhile the import contracted more by 2.71% YoY to USD4 bn. Thus, Indonesia’s export to China decreased by USD211.9 mn. 


COVID-19 threatens the import side as well

Not only the decline of demand side that hits Indonesia’s export, we face other impediments for our import. The main laggards in imports were machinery and mechanical appliances (-11.2% MoM), iron and steel (-10.9% MoM) and electrical appliances (-1.79% MoM). Besides the COVID-19, the contraction happened due to the end of Lunar New Year where the demand of fruits faced the biggest fall on import from China by 78,9% YoY to USD33,9 mn. The above laggards brought Indonesia’s import from China decreasing by USD125.2 mn. As the result, the trade deficit between Indonesia with China was USD1.8 bn. Despite the weaker trade performance with Indonesia, China is still our biggest trading partners.


Hit on production input imports

Based on the use of the imported goods, the raw/intermediate goods was fall by -7.35% YoY to USD10.6 bn and capital goods decreased by -5.26% YoY to USD2.23 bn. Meanwhile, consumption goods increased by 20.3% YoY to USD1.47 bn. The decrease of raw/intermediate goods should be overseen since its share to total import were 74.1%, followed by capital goods (15.6%) and consumption goods (10.1%). The fall of imports on such inputs that are needed in domestic production threatens domestic manufacturer since they will face some shortage on their input. Based on the goods classification, machine and mechanical equipment were the highest contributor of import where it fall by -11.7% MoM to USD1,723 mn but still contributed as much as 13.3% to total import. From this, we can expect Prompt Manufacturing Index (PMI) Indonesia for Jan-20 will fall.


Opportunity for rupiah and rate cut

Certainly, COVID-19 will affect Indonesia economy due to its detrimental impact on China’s economy. However, if we take a look on other economies, Vietnam’s export linkage to China is 16.2% of GDP, Singapore (13.9%) and Malaysia (9.0%). Meanwhile, Indonesia’s export linkage to China is 2.4% of GDP: significantly lower than the peers. We see the trade balance in 1Q20 will be deficit due to the shocks from the COVID-19 that hit China the most. Nevertheless, compared to Jan-19, the deficit actually narrowed and this may bring positive sentiment on rupiah where the currency appreciation was the highest among the other Asia peer countries’ currencies by 0.24%. Now, BI has wider room to have its first rate cut in 2020 in order to hold back the brisk appreciation. We expect a 25 bps cut will be taken in this 1Q20.