The Indonesian export market is clearly feeling the effects of the crisis as it watches key destination markets dry up. However, with government intervention, relatively solid local bank liquidity and predictions of a 5% growth in the country’s economy in 2010, Indonesia is well-placed to survive, and, perhaps, eventually flourish. Katherine Demopoulos reports.
Indonesia’s exports have plummeted since last September as the economies of nine of the country’s 10 biggest export destinations contract. But ongoing investment in the domestic telecoms, power and transport sectors will underpin imports.
When campaigning began last year for Indonesia’s April 9 legislative elections, which looks set to solidify the government of incumbent President Susilo Bambang Yudhoyono, the 38 political parties vying for power didn’t predict the scale of the trade slump they would have to deal with.
The latest figures from the trade ministry show February exports plummeted 33% year-on-year to US$7.08bn, from US$10.55bn in February 2008. Month-on-month February export figures are more encouraging, showing a fall of just under 1% from US$7.15bn in January 2009.
“The bulk is driven by a 57% collapse in [the dollar value of] oil and gas exports,” says Ngiam Ai-Ling, director at Fitch. “The trade numbers are not looking good for the past few months. And imports are following exports, because of the imported inputs. There’s a fair share of imports which goes into the export numbers.”
Exports are also down sharply in volume terms, coming in at 38.79 million metric tonnes in the first two months of this year, versus 55.51 million metric tonnes in the same period of 2008.
The volume slowdown is blamed on a fall in deliveries of “consumer goods and manufactured goods to the US and EU”, according to Andin Hadiyanto, secretary of trade, research and development at the trade ministry.
Benny Sutrisno, vice-chairman for trade affairs at Kadin, Indonesia’s chamber of commerce, says that commodity price declines have so far been the major issue for Indonesia exporters, but fears further falls if current global trends continue.
“The export sector hit hardest is the commodities sector, textiles and clothing, shoes, fisheries, where the unit prices fell drastically,” comments Sutrisno. He expects the dollar value of 2009 shipments to drop by 10% from 2008.
At Bank Danamon, economist Helmi Arwan is preparing to revise his forecast – made late December 2008 – that Indonesia’s exports will drop 9% in 2009. He highlights a 6% year-on-year contraction in the Indonesian manufacturing sector in January, and sees further export volume drops.
“Judging from the decline in global industrial production, we expect the volume decline to be substantial,” he says.
Indonesia’s ministry of trade puts 2008 exports at US$128.12bn. A 10% cut in the dollar value of exports trims the 2009 figure to US$115.31bn, only just above the US$114.10bn exported in 2007.
That Indonesia’s economy has fared relatively well in comparison with its peers is a result of its strong domestic economy, and a reliance on Asian buyers, who take two-thirds of Indonesia’s non-oil and gas exports. “Asean countries keep the exports flowing,” says the trade ministry’s Hadiyanto.
The domestic market contributes 70% to Indonesia’s GDP, and is a key reason that Bank Indonesia is able to forecast growth at 3-4% this year.
“There are three countries in Asia that are less affected by the crisis. China, India and Indonesia, mainly because of their domestic demand,” comments Fauzi Iksan, chief economist at Standard Chartered.
Indonesian government responses
In the face of the export slump and tightening credit liquidity, Bank Indonesia and the ministry of trade and the finance ministry have introduced a series of measures, including a requirement that all exports of crude palm oil, coal and other key raw materials valued at more than US$1mn must be backed by a letter of credit and paid into an Indonesian bank.
The trade ministry’s Hadiyanto says the policy aims to protect smaller exporters who were not being paid by buyers, and also to boost dollar reserves. Exporters may now apply for temporary exemption until August 31, and many exporters, including Indonesia’s top two coal suppliers Bumi Resources and Adaro, have already done so. Implementation of the regulation had already been deferred to April 1 from March 5.
Indonesia’s trade ministry is focused on diversifying away from its traditional markets in the US, Japan and EU – to which Indonesia is already shipping less – and looking further afield.
“Right now, the most promising countries are in the Middle East,” says Hadiyanto. Indonesia recently sent a trade delegation to the region, and is also looking at new bilateral trade agreements with Australia and Pakistan.
Dian Rae, Bank Indonesia’s deputy director of the international directorate, says US$12bn has been agreed in currency swaps with Japan and a further RMB100bn (US$14.63bn) with China’s central bank.
Further, the government has also approved an Export-Import Bank, built from the foundations of Bank Ekspor Indonesia, a commercial bank, he says. It will be capitalised with Rp4tn (US$355.16mn) and will be topped up by the central bank, government and commercial markets. It won’t, however, begin operating for another six months, and a final plan on exactly how much money it will be backed with has not been finalised.
“It will finance strategic industry – shipbuilding, also the aircraft industry, trains and some other strategic industries. This kind of Ex-Im bank is actually not going to compete with the existing financing from the banks. As long as they can finance, let the banks finance. This institution is expected to deal with the big projects,” adds Rae.
Bank Indonesia has also reactivated a post-shipment discount facility that was halted during the Asian crisis, enabling banks with liquidity problems to sell export documents to the central bank to raise cash.
But not a single bank has taken advantage of the facility. “For us that’s a good sign. The liquidity is there. We don’t have a problem with that, but we’ll stand ready whenever we need it,” says Rae.
But he notes that only US$4.46bn in loans was disbursed in January and February this year, versus US$7.95bn in the first two months of last year.
Credit for Indonesian exporters?
Benny Seotrisno at Kadin, the Indonesian chamber of commerce, hopes the new Ex-Im bank will alleviate problems some members are experiencing in accessing trade finance. “The banks always say they have no additional capacity to give export trade facilities,” he says.
At Bank Nasional Indonesia, which finances infrastructure, mining, energy and crude palm oil, Henry Panjaitan, head of marketing and advisory on trade finance for 40 of Indonesia’s largest companies, says financing has become more expensive and credit demand from many customers has halved.
“Since October 2008, the rate for financing trade activity has jumped. Last year, from January to September the rate for trade activity is based on Libor plus or Sibor plus. It’s usually Libor plus two or three, which is equal to 4% to 6%. But from October until now we finance trade activities from deposits or accounts so the rate has jumped to about 10% per month,” he says.
He adds that issues in other countries are affecting Indonesian exports. For Pakistan, a deal last year went awry when a client’s exports were received by the buyer, but the Pakistan central bank intervened to stop the payment temporarily. It has since been received, he says.
Ady Yatim, head of trade finance at Deutsche Bank, which has grown its Indonesia trade business by 70% over the past two years, says the bank is “positive but cautious about trade finance business in Indonesia”.
“The global economic downturn has probably somewhat been in favour for us because now a lot of people are increasing their trade enquiries to us. So it is not a problem that we see. It’s a blessing in disguise.”
“We have to be more prudent and have a stronger due diligence process,” he explains, although LCs (letters of credit) are still readily available. In fact, demand at Deutsche Bank has increased due to Indonesia’s new LC regulation and the difficulties faced by other banks in providing foreign currency loans.
“Obviously with the liquidity situation in the market, the cost of financing these has increased by 2-3% compared with the first quarter of last year,” he adds.
Further, many exporters are increasingly looking to boost cashflow by encashing their export documents for a discounted value early on. Volumes of discounted financing are “normal” so far, but Deutsche Bank has received “a lot of new enquiries regarding whether we have the capability to do this”, says Yatim.
Indonesia exporters are also increasing their reliance on state export credit agency Asuransi Ekspor Indonesia, which increased its export cover to Rp525.6bn in the first quarter of this year, versus Rp423.5bn in the same period of 2008.
Imports and investments
The tidal wave of water that burst through a colonial-era dam on the outskirts of Jakarta in March, killing almost 100 people, amply demonstrates just how much investment is still needed in the country’s aging – and ailing – infrastructure.
Hongjoo Hahm, head of infrastructure in the sustainable development department of the World Bank in Jakarta, comments that public infrastructure spending had slumped to a “precipitously low” 2% of GDP in 2002 from 6% in 1998, and is now “somewhere between 4 and 5% of GDP”.
Private infrastructure spend was also weak before the crisis, and weaker now still. “The only area in which it was active was telecoms,” he says.
Evert Jan Zondag, director of cross-border structured trade and commodity at RBS Global Banking & Markets, continues to regard Indonesia as “a very strong growth market”. He sees opportunities in many sectors, of which “telecoms, infrastructure, aviation, utilities and power plants are the biggest ones”.
Having closed a total of US$428mn in financing for telecoms firm PT Excelcomindo Pratama last year, covering the purchase of equipment and services from Ericsson, he highlights “big capex plans” at the telecoms company’s peers Telkomsel and Indosat. Together, the three control 90% of Indonesia’s mobile telecoms market.
But he cautions that, “on the telco side, Telkomsel, Indonesia’s largest operator and Indosat, the second largest, are currently reviewing their capex plans and financing options including potential ECA structures”.
From July 2007 to June 2008, Excelcomindo spent approximately US$1bn on capex, but has just approved US$600mn for the coming year. This is partly a consequence of the global slowdown, and partly to be expected, given previous spend.
Another Asian banking source says Telkomsel, Indonesia’s largest operator, has issued an invitation for banks to cost ECA-backed loans totalling up to US$900mn over two years – although it’s likely not all of this will be drawn on – to fund the purchase of wideband CDMA and 2G GSM equipment from Ericsson, among others. Indosat is currently arranging a US$200mn one-year loan to finance its own expansion.
“You can see that a lot of slack is in the process of being taken by the ECAs… I think projects can still be funded, but perhaps the quantum of the financing will be limited to how much the ECA and how much the local currency banking market can support,” the source adds.
Hardyana Syintawati, Ericsson Indonesia vice-president of marketing and communications, says the company remains optimistic on the Indonesian telecoms outlook. “The size, the penetration rate – it’s still comparatively low compared to neighbouring countries – as well as [the fact that] mobile telephony is Indonesia’s main way of communicating.”
Indonesia’s power shortage
Indonesia remains desperately short of installed power capacity, despite the country’s status as the world’s largest exporter of thermal coal and third largest LNG exporter.
But investment in the country’s 10,000MW power programme is ongoing.
A source at the financial advisor to PLN says the state generator is in advanced talks to sign financing deals totalling US$1.2bn for three further coal-fired plants totalling 2,520MW. “Two of the three are expected to be concluded in the next month or so,” he confirms.
The World Bank is also pulling together financing for a 2,000MW IPP for Java, Indonesia’s most populous and power-hungry island. Progress is steady, with a market sounding last month and an invitation for expressions of interest to be issued shortly, says the World Bank’s Hahm.
“This would be a major private sector investment in the energy sector,” he adds.
Elsewhere in energy, work on two LNG projects – BP’s Tangguh in Papua and PT Donggi Senoro in Sulawesi – is ongoing, but the financial crisis has hit shipments to Japan, Indonesia’s largest LNG customer, reports analyst Kurtubi.
“Our Japanese buyers have announced that they will import less LNG from Indonesia because their consumption is declining,” he says, noting that 15 cargoes will be cancelled this year, out of a total of 300 shipped to all buyers.
Indonesia’s airline sector received a boost on April 6 from the US Ex-Im, when it announced it had approved US$1bn in financing for local airline Lion Air to buy 30 planes from Boeing. The bank called the deal “a vote of confidence in the improving aviation regulatory and business environment in Indonesia”, and it follows US$346mn in financing agreed in March for national carrier Garuda.
Local banks are also joining with ECAs to fill the credit void left by commercial banks and are not deterred by current market conditions. They are limited in their ability to provide dollar loans – aside from short-term LCs – but continue to back rupiah transactions.
According to Bonar Silalahi, head of capital markets for HSBC Indonesia: “For telecoms and for infrastructure, local banks will still have a good appetite to fund in rupiah currency, because local banks have quite strong liquidity in rupiah. The top ten banks would still have good appetite.”