ECONOMIC UPDATE – External trade review
Welcome to Global Slowing Down Era
Trade deficit came as expected but not the cause
December trade deficit reported at USD -1.1 bn is in-line with Bloomberg consensus, of USD1.15 bn although it came even better than our estimates of USD1.55 bn. However, the source of deficit made us worry further about the outlook of CAD and GDP growth in 2019. Export fell -4.6% YoY and import only experienced 1.2% YoY growth in December. We believe this should be the sign of slowing down economy going forward.
Negative effect from China
Export fell -4.6% YoY (-4.89% MoM) to USD 14.2 bn in December as the demand from China reduced. Previously, China reported its weakening trade performance as its both export and import had a negative growth (-4.4% YoY and -7.6% YoY, respectively) which we believe as the sign of China’s slower growth. It hurt Indonesia’s export significantly as non oil and gas export to China declined by -23.9% YoY (-17.9% MoM) in December. Further disruption on China’s growth due to trade war in 2019 should give negative sentiment to Indonesia.
Weak commodities, gloomy export outlook
On our previous reports, we have mentioned that Indonesia’s high reliance on commodities export may endanger Indonesia if the commodity prices start to trend down. Current export figure proves our concern as commodities export negative growth (-20.8% YoY) brought overall export growth into negative territory (-4.6% YoY). Based on products; ores, slag, and ash became the main driver of negative export growth as it posted -71.28% YoY growth in December, followed by animal or vegetable oils/fats (including CPO) that posted -17.62% YoY growth. Coal also had negative trend as the mineral fuel export had negative growth of -1.35% YoY or the first negative growth since July 2016. We see the downside risk for coal still high as our coal analyst sees further declining China’s import growth by 7.0% in 2019 and lower benchmark price forecast at USD 85/ton (prev: USD 90/ton).
Low oil price started brought import growth lower
Import growth weakened to 1.2% YoY in December. We see lower oil price started to take oil and gas import down as December figure denoted negative growth of -23.3% YoY. Based on economic sector, the weakening growth was seen on raw/intermediary goods that experienced 0.9% YoY growth and capital goods that had -0.3% YoY growth. Meanwhile consumption goods import still had 6.2% YoY growth due to year-end trend. However, weakening import growth, especially in raw/intermediary goods and capital goods, may result in lower domestic demand historically as seen in exhibit 4.
Future of CAD: sluggish global growth vs lower oil price and govt policy mix
In 2018, Indonesia suffered significant trade deficit of –USD 8.6 bn or the record high in history according to BPS. The fall of oil price in late 2018 gave some hope of better trade figures going forward combined by government policy mix to curb import. However, there is a major challenge from sluggish global growth outlook, especially from China. Weakening growth from trade war effect may give pressure to the export as seen from December data. This year will be the fight between sluggish global growth vs lower oil price and govt policy mix to determine continuity of historical high trade deficit.
Fragile road ahead, put some of our forecast under review
The volatility from external trade will remain high as long there is no satisfying deal from both US and China in the trade war. Indonesia’s effort to diversify export products still need a long journey as investment in manufacture still does not significant improve after Indonesia’s structural reform in infrastructure, budget and administration. However, Indonesia rupiah will have more favorable condition as slowing down global growth may lead to more dovish the Fed. We put our GDP, current account deficit (CAD) and Rupiah target for 2019 under review considering current circumstances.