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ECONOMIC UPDATE - External trade review - The trade surplus narrows more than expected



Thin trade surplus

According to Statistics Indonesia (BPS), Indonesia's trade surplus decreased significantly from USD3.45 bn in June to USD1.31 bn (-61.9% MoM) in July, mainly driven by higher imports. This came below both our estimate and the consensus estimate of USD2.41 bn and USD2.55 bn, respectively. Additionally, on an annual basis, the trade surplus showed weaker performance, shrinking by -68.21%  from USD4.12 bn in the same month of the previous year. Indonesia has maintained a positive trend in international trade since May 2020, resulting in 39 consecutive months of trade surplus. Meanwhile, considering the cumulative performance in the first seven months of 2023, the trade surplus shrank by -27.1% YoY, decreasing from USD29.11 bn in 7M22 to USD21.23 bn in 7M23. Looking forward, it is predicted that export performance will continue to decline due to the decrease in commodity prices, driven by weakening global demand. Many major central banks are persistently implementing a policy of higher interest rates to counter ongoing inflationary pressures. This is expected to negatively affect the real sector's performance. Conversely, imports are projected to outperform exports, propelled by the enduring strength of the domestic economy. As a consequence, our forecast indicates a further decrease in the trade surplus and the possibility of the balance shifting into a deficit. Overall, we maintain our prediction that the current account might show a slight deficit of -0.5% of GDP in 2023 (in contrast to a surplus of 1.0% of GDP in 2022).


Exports rely on commodity prices

Total exports experienced a contraction of -18.03% YoY, amounting to USD20.88 bn in July 2023. However, this decline was an improvement compared to the previous month's -21.18% YoY. Furthermore, this figure slightly exceeded estimate of –17.40% YoY but fell short of the consensus forecast of -19.30% YoY. On a monthly basis, total exports gained by 1.36% MoM. In detail, oil and gas exports decreased by -2.61% MoM to USD1.22, while non-oil and gas exports accelerated by 1.62% MoM to USD19.65 bn. The main country destinations of non-oil and gas exports in July-23 were China at USD4.93 bn (7.52% MoM), followed by the United States at USD2.03 bn (4.07% MoM), and India at USD1.82 bn (9.42% MoM). We believe the export trend is affected by the main commodity price. On a monthly basis, CPO and coal prices grew by 0.64% MoM and 7.18% MoM to USD3775/MT and USD137.3/ton, respectively. However, on a yearly basis, CPO and coal prices shrank by -13.31% YoY and -66.39% YoY, respectively.


Imports grow amidst manufacturing expansion

The total imports shrank by -8.32% YoY to USD19.57 bn, beating our forecast and consensus of -12.4 YoY and -15.38% YoY, respectively. However, on a monthly basis, total imports grew by 14.10% MoM.In detail, oil and gas, and non-oil and gas imports increased by 40.94% MoM and 10.10% MoM to USD3.13 bn and USD16.43 bn, respectively. Raw/intermediary goods continued to dominate the import sector, accounting for 71.11% of the total import. From the selected non-OG sector, the biggest contributor (17.74% of total non-oil and gas imports) came from machinery/mechanical appliances and part thereof (HS 84), which also increased by 12.99% MoM to USD2.92 bn. In addition, the main import commodities, such as oil, rose by 15.86% MoM but decreased by -17.05% YoY to USD81.8/BBL. We believe the increase in imports represents expansion in domestic business activity, this is also reflected in the manufacturing purchasing manager index (PMI) which increased to 53.3 in July 2023 from 52.5 in the previous month.


Navigating volatile oil market

Saudi Arabia has committed to extending its voluntary reduction target for oil production by 1 mn barrels per day until September 2023. In a similar vein, Russia has made a commitment to lower its oil exports by 300 thousand barrels per day for the upcoming September period. In the realm of oil market dynamics, WTI crude oil prices rose 15.86% MoM to USD81.8 per barrel in July. However, on a yearly basis, the price of crude oil observed a substantial decline of -17.05% YoY. Our analysis suggests that the oil production cuts by Saudi Arabia and Russia possess the potential to elevate crude oil prices. As such, it would be prudent for the government to be prepared for a potential surge in crude oil prices, particularly since oil is a primary imported commodity for Indonesia. To mitigate this situation, we think the government should focus on enhancing domestic oil production.


Securing rice supply amidst El-Nino

The Indonesian Bureau of Logistics (Bulog) has been authorized to import 2 million tons of rice during 2023 to ensure food security in anticipation of the El Nino phenomenon. As of May 2023, 500 thousand tons of rice had already been imported. Bulog has confirmed that the sources of rice imports will encompass various countries, including Vietnam, Thailand, and Pakistan. Their projection indicates that all imported rice quantities will be procured by December 4, 2023. Furthermore, the government is also preparing a plan to accelerate the planting season to counter potential production declines due to El Nino. We believe rice availability will be sustained until the conclusion of 2023. However, the government should prepare for a potential global increase in rice prices. This is because India, the world's largest rice exporter with around 40% of the global rice market share, has implemented a ban on rice exports