Indonesia witnessed a substantial recovery in its exports during May, following a less impressive performance in the preceding month. This sharp increase has provided a robust boost to the nation’s trade surplus. However, economists warn that there are still potential stumbling blocks ahead, owing primarily to the unpredictability related to US tariffs.
According to information made public by Indonesia’s statistical agency this Tuesday, exports in May leapt 9.68 per cent from the previous year, significantly surpassing the modest increase of 0.4 per cent that had been foreseen by a Reuters survey. This resurgence in exports was spearheaded by noteworthy shipments of palm oil, base metals, jewelry, semiconductors, and organic base chemicals.
This strong increase in exports played a major role in skyrocketing Indonesia’s trade surplus to US$4.3 billion in May, an enormous difference from the paltry sum of US$160 million the preceding month. Among the export products, the trade in iron and steel with China registered a growth of 31.56 per cent notwithstanding the uncertainty surrounding US tariffs.
However, the strengthened position may prove unstable in the long run say analysts. An observation by Josua Pardede, Chief Economist at Permata Bank, highlights the challenges. He says, ‘Despite a reduction to 30%, US tariffs on Chinese goods continue to be higher relative to the period prior to the trade conflict. This situation continues to put pressure on global demand and in turn, Indonesia’s exports, especially as commodity prices are deflating and China’s economy continues to slow.’
While the recent agreement might have eased the China-US trade stress to a certain degree, the future remains uncertain for several countries, including Indonesia. This uncertainty arises as the President of the United States, Donald Trump draws closer to his stated deadline on tariff reviews on July 9th. The US has hinted that extensions are improbable, thereby elevating apprehensions over potential new tariffs.
Despite the relief from the eased tensions, Indonesia is still facing external turbulence as per Josua Pardede, chief economist at Permata Bank. He further added, ‘US tariffs on Chinese goods, although trimmed to 30%, still mark a spike from the pre-trade war phase. This scenario continues to weigh on the global demand and conquer Indonesia’s exports, especially as global commodity prices deflate while China’s economy undergoes a sustained slow down.’
Indonesia, which is the biggest economy in South-east Asia, is getting hit by the brunt of high tariffs of 32% under the trade measures adopted by President Trump. Statistically, between January and May, Indonesia’s export figures for machinery and electronic equipment to the US surged by 18%. Conversely, Indonesia’s import of mechanical machinery and equipment from China grew by 22.9% during the same months.
These movements suggest a strategic rerouting of exports through various regions to secure the benefits of a differential in tariffs, noted economist Radhika Rao. However, in contrast to these movements, Indonesia’s import registered a meagre increase of 4.14% yoy but experienced a marginal monthly dip of 1.32%, indicating a cool-off after a sudden but significant swell during April.
The import sector saw a massive decline in precious metals, with a decrease of 78.39% month on month, likely due to a drop in gold demand in May amidst easing trade strains. A contraction in domestic demand has helped keep a check on the import growth, maintaining a reasonably good trade surplus. On the other hand, the recent decrease in global oil prices amid reduced tensions in the Middle-East has given some respite to Indonesia’s foreign balance.
A considerable rise of 53% was observed in Indonesia’s exports of crude and refined palm oil in May, amounting to 1.88 million tonnes, underpinned by a strong demand from India. On inflation, consumer prices saw an increment of 1.87% year on year in June, bouncing back following a short-lived stint with deflation the preceding month, as indicated by official data.
Food inflation was particularly volatile, with steep price hikes reported for household staple food items including shallots, rice, tomatoes, and bird’s eye chillies. The annual headline consumer price index (CPI) inflation showed a slight acceleration in June, increasing to 1.87% year on year from the earlier 1.6% recorded in May. Meanwhile, the core CPI inflation remained largely stable, witnessing a slight reduction to 2.37% year on year from 2.4% in the preceding month.
Administered price inflation experienced a slight increase, due primarily to increased airfares during the heavy travel season of school holidays. However, these rises were mitigated somewhat by a decrease in the prices of non-subsidized fuel, following official changes in pricing. The risk related to the subsequent ‘trade war 2.0’, particularly reciprocal tariffs, has subsided subsequent to the US-China trade agreement, triggering capital inflow which has helped alleviate the risk of inflation spilling over from producers to consumers.
Finally, we must remember that despite certain positive indicators, the future is uncertain and heavily influenced by global events. However, economic mechanisms are being put into place in Indonesia to counteract this uncertainty, a feat which will hopefully pave a smoother way forward for Indonesia’s economy.