Indonesia Braces for Export Hit as Virus Saps Chinese Demand
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A nascent recovery in Indonesian exports is under threat, with the coronavirus outbreak set to sap Chinese demand for commodities including palm oil, coal, paper and pulp.
Indonesian shipments may drop by a half-percentage point for every full percentage point decline in Chinese growth, Kasan, head of the Research and Development Agency at Indonesia’s Trade Ministry, said in an interview with Bloomberg News. With Chinese economic activity slowing down, Indonesia’s own imports from China -- especially raw materials and components needed by manufacturers -- could be hurt too, Kasan said.
The economic fallout from coronavirus threatens to upend early signs of a recovery in Indonesia’s exports, which have suffered since late-2018 amid the U.S.-China trade war. Now, with some factories in China shuttered to prevent the deadly bug from spreading further, Indonesia will need to explore alternative export markets, Kasan and other senior officials say.
“Our exports to China are big,” said Kasan, who like many Indonesians uses only one name. “If their economic activity is disrupted, ours will be too.”
While Indonesia is less exposed to global supply chains than other Southeast Asian countries, it’s the world’s biggest exporter of coal and palm oil, and China is a major customer.
China is Indonesia’s biggest trading partner and its top export destination, with shipments last year -- mostly coal, nickel, palm oil, pulp and copper -- valued at $28 billion, Trade Ministry data showed. Indonesian manufacturers also rely heavily on raw materials and components from China, with imports last year totaling $45 billion.
Indonesia’s exports rose 1.3% in December, their first gain since October 2018, helping narrow last year’s trade deficit to $3.2 billion from $8.6 billion a year earlier. President Joko Widodo has said the trade shortfall and current-account gap -- which the central bank says narrowed to about 2.7% of gross domestic product last year -- remain key concerns.
The spread of coronavirus may undermine efforts to rein in the twin deficits, just as an initial trade deal between the U.S and China had provided a sense of optimism to emerging markets.
“With China reducing activity, that means there are some industry operations that are disrupted, for entry of goods and also exit of goods,” Kasan said. “Will this problem be prolonged, or just for a short period? We don’t know yet.”
Anthon Sihombing, chairman of the Importers Association of Indonesia, said anything that causes a major disruption to imports would seriously hamper exporters. He said Indonesia must find new export destinations and sources for raw materials and other inputs.
“Stopping imports will kill our exports too,” he said.
The virus outbreak adds to pressure for more interest-rate cuts after Bank Indonesia lowered rates four times last year to support economic growth. The economy expanded at its weakest pace in four years in 2019, figures released Wednesday showed.
“Indonesia’s direct exposure is lower than other countries in the region, but a sharper slowdown in China as a result of the outbreak will hurt commodity producers like Indonesia,” said Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore. “We believe financial conditions could also tighten if weak investment sentiment leads to capital outflows.”
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