Analysis | Gundy Cahyadi
Commodity exports make up a sizeable portion of both Indonesia’s and Malaysia’s economy, so it is no surprise that there have been increasing concerns about both countries’ growth prospects amid recent signs of a moderation in commodity prices.
Export growth in both countries has been on a downward trend in recent months, raising doubts about their economies from a growth and flow perspective.
Simply explained, falling export earnings will not only affect growth directly but will have negative spillover effects on domestic demand, through the negative impact on wages in the related sectors.
The commodity boom seen in the past several years has led to a spike in both new investment and employment in commodity-related sectors, including the likes of crude palm oil plantations and coal mining in Indonesia.
Meanwhile, the still relatively robust domestic demand in both these countries means that we have also seen a rather sharp deterioration in the trade balances of each economy.
Interestingly, though, despite the fact that Indonesia’s domestic economy is relatively bigger than that of Malaysia’s, concerns over the deterioration in export growth seem to have been relatively more intense in Indonesia.
Among other factors, the extent of moderation is a clear answer to this disparity, especially if we consider that Indonesia is currently running a trade deficit for a second consecutive month, the first time we have seen back-to-back trade deficits stretching back to the early 1980s, when trade data starting being made available.
Second, the introduction of an export tax on various commodities has weighed on Indonesia’s export growth in recent months, and given the small likelihood that we are going to witness a U-turn in the government’s policy, we expect little recovery in Indonesia’s export growth in the coming months.
Last, about 40 percent of formal employment in Indonesia is concentrated in agriculture and mining, compared to only about 15 percent in Malaysia. Presumably, the income effect from dwindling commodity export earnings would be relatively more significant in Indonesia than Malaysia.
As to what extent this concern has adversely affected Indonesia’s market performance relative to Malaysia’s remains debatable. Across the board, Indonesia’s assets have been underperforming Malaysia’s for 2012, as evidenced in the accompanying graph. The lingering depreciative pressure on the rupiah is mostly a function of tight US dollar liquidity onshore, which in part is caused by the disappearing trade balance.
At the same time, when we put into perspective the fact that Indonesia’s assets have been some of the best performing assets globally in the period of 2009 to the middle of 2011, profit-taking could have been the bigger reason behind Indonesia’s underperformance this year.
In particular, it is interesting to note that as of June 2012, foreign ownership of government bonds in Indonesia has slipped significantly from about 35 percent of total outstanding bonds to about 28.5 percent currently.
Gundy Cahyadi is an economist at OCBC Bank in Singapore.