Safeguarding Financial Stability: Some Notes on Indonesia's Trade Balance

In the late 1990s, Indonesia lost its status as an Asian Tiger when its financial system collapsed. During the Suharto era, the country was well on its way to become a major global exporter of manufactured goods as the government wanted to become less dependent on oil production and eager to develop import substitution industrialization. Not long after the Asian Financial Crisis hit Indonesia in 1997-1998, the 2000s commodities boom was a blessing for Southeast Asia's largest economy. In combination with the influx of foreign direct investment/FDI (attracted by cheap labour), per capita GDP started to grow steadily and the middle class expanded rapidly forming an increasingly large consumer force. However, export-oriented manufacturing lagged behind and thus the country remained dependent on the export of (mainly raw) commodities. Manufactured exports currently account for only about 30 percent of Indonesia's total exports. When the commodities boom eased, Indonesia quickly saw its traditional trade surplus diminish and finally turn into a deficit since 2012.

Imports, on the other hand, show robust growth as Indonesia's middle class is expanding rapidly. In 2012, Indonesia's middle class numbered around 75 million people (of a total population of around 240 million people). Research firms the Boston Consulting Group (BCG) and McKinsey expect that the country's middle class will grow to between 130 and 140 million people by the period 2020-2030 amid continued economic expansion. The World Bank reported that each year around seven million Indonesians join the ranks of the middle class. This large consumer force demands for many technological products from overseas and attract further foreign direct investment. As such, imports have risen sharply in recent years (with the exception of 2013 when the central bank and government deliberately curbed domestic demand in order to safeguard the country's financial make-up, particularly the widening current account deficit which pressured the Indonesian rupiah exchange rate).

Turning the trade balance back into a surplus is one of the main targets of the Indonesian government and there are several ways to improve the balance. First of all, the country can curb fuel subsidy spending further. Although, prices of subsidized fuels were raised in June 2013, Indonesia still subsidizes a significant portion of fuel prices today. In the 2014 State Budget, IDR 210 trillion (USD $18.6 billion) is allocated for fuel subsidies. As domestic oil production has been in a state of decline for over a decade, the government is increasingly dependent on oil imports to meet growing domestic demand thus leading to the structural trade deficit in the oil & gas sector. However, hiking the fuel price is a politically and socially sensitive topic.

The government is eager to develop the production of crude palm oil-based biofuel by increasing the mandatory content of fatty acid methyl ester (which is derived from palm oil) in biodiesel products from 7.5 percent to 10 percent. Through this program, the government expects to save up to USD $3.5 billion as it needs less fuel imports.

World's Ten Largest Exporters in 2012 (in billion USD)		World's Ten Largest Importers in 2012 (in billion USD)
1. China	2,049	1. USA	2,336
2. USA	1,546	2. China	1,818
3. Germany	1,407	3. Germany	1,167
4. Japan	799	4. Japan	886
5. Netherlands	656	5. Great Britain	690
6. France	569	6. France	674
7. South Korea	548	7. Netherlands	591
8. Russia	529	8. Hong Kong	553
9. Italy	501	9. South Korea	520
10. Hong Kong	493	10. India	490
-  Indonesia	190	-  Indonesia	192

^{Source: WTO}

Indonesia's Trade Balance 2010-2013 (in billion US dollar):

	2010	2011	2012	2013
Export	157.8	203.5	190.0	182.6
Import	135.7	177.4	191.7	186.6
Balance	+22.1	+26.1	-1.7	-4.0

^{Source: Statistics Indonesia}

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