FOCUS : PURCHASING POWER OF THE PEOPLE TO GROW IN 2007

INDONESIAN COMMERCIAL NEWSLETTER

August 2008

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DEFISIT IN TRADE BALANCE JOLTS CAPITAL MARKET

The country recorded its second trade deficit this year of US$270 million in July 2008 as a result of falling exports of non oil/gas commodities. Imports in July were valued at US$12.82 billion exceeding exports of US$12.55 billion. The deficit was attributable mainly to a decline in the exports of crude palm oil (CPO) one of the country's star performers in exports. The decline in exports came when imports surged for industrial basic materials and capital goods.

The previous deficit in the country's international trade was in April this year when exports were valued only at US$10.97 billion as against imports of US$11.5 billion.

Prices of primary commodities declining

A sharp fall in the CPO export earning was the main cause of the deficit. The country's CPO exports in July shrank to US$581 million from US$2.06 billion in the previous month.

Trade Minister Mari Elka Pangestu said the decline in the CPO export earning was caused not only by falling price of that commodity but also caused by the producers' decision to reduce exports in volume. Palm oil producers held exports waiting until the government cut the export tax to follow the price fall. The government cut the export tax on palm oil to 15% in August from 20% in July. The policy of the producers has resulted in large stock of CPO in the country lately.

Mari said the country's CPO exports were estimated to rise again in August as the export tax has been reduced.

Observers said the rare trade deficit that came twice this year served as a warning to the government. If deficit continues more often in the future the impact would be bad on the country's economy in general. They said the deficit may weaken the country's economic resilience as the country's economic growth had long relied mainly on high growth exports and consumption sector. Strong growth has been recorded in the country's exports in the past several years despite the deficit in April and July. Exports have been boosted by the surges in the prices of primary commodities including plantation and mining commodities.

Some observers, however, said the deficit in July could signal a turn around in exports after long been on the rise. The condition could be worse with the downtrend in the prices of primary commodities notably CPO.

The past two months saw a downtrend in the price of crude oil in the world market. After peaking at US$142.27 a barrel on July 11, 2008, the prices of crude oil began to slide and was recorded at US$105 a barrel by the end of August. The decline in the prices of crude oil resulted in a decrease in the prices of other primary commodities. Meanwhile, the U.S. dollar began to gain strength encouraging many speculators to invest in the currency rather than in commodities.

It is predicted the crude oil prices would continue to scale down and would go down to below the psychological level of US$100 per barrel Even oil producers of OPEC do not want the price soaring too high. They do not call for production cut to shore up the prices.

The decline in the prices of crude oil in the past several months has also dragged down the prices of CPO and derivatives. The price of CPO in mid August, 2008, as recorded by the Malaysian Future Exchange fell sharply again by 8.7% to the level of 2,392 ringgit per metric ton or the lowest since May, 2008.

The prices of other vegetable oils such as soybean oil have also declined. With price fall, many consumers who have used palm oil as cheaper substitute for the more expensive soybean oil have again sought the type of vegetable oil to the taste of which they have been more accustomed .

The CPO price fall has resulted in a decline in the prices of the shares of publicly traded palm oil companies in August like PT Astra Agro Lestari Tbk (AALI). The price of the shares of AALI, one of the country's largest palm oil producers sank 1,100 points to Rp16,600. The price of the shares of PT London Sumatera Tbk (LSIP) also plunged 550 points to Rp 5,900.

Similarly a number of mining stocks have also dropped in prices. Market analysts linked the declines to fears of continued deficit in the country's international trade.

The prices of nickel have dropped sharply. The price of nickel fell to a record low in May, 2008 in the London Metal Exchange as many steel companies cut purchases. The price of nickel fell US$920 to US$27,600 per ton in May, 2008.

However, not all mine products were hit by price fall. The price of tin surged following Indonesia's announcement about a cut in exports of that commodity. The price of tin metal rose 2.5% or US$600 to US$24,600 per ton nearing the all time record of US$24,602 per ton on April 24 in 2008.

The prices of primary commodities are expected to fluctuate in the coming several months that they may have bad impact on the country's exports.

Surplus expected again in trade balance.

Trade Minister Mari Elka Pangestu dismissed suggestion that the trade deficit in July signalled a turnaround in the country's export performance, which has always left substantial annual trade surplus in the past years.

Increase in the imports of industrial basic materials and capital goods also contributed to the deficit in the trade balance in July. Imports of basic materials have continued to scale up from month to month this year. In May, imports of industrial basic materials were valued at US$ 9,319.2 million. In July the import value rose to US$ 9,766.7 million.

The chief of the Central Bureau of Statistics (BPS) was even more optimistic saying the increase in the imports of industrial basic materials and capital goods indicated brisker activities in the manufacturing sector that need imported basic material. Growing manufacturing sector is expected to result in an increase in the production of export oriented non oil/gas commodities. Therefore, BPS predicted the country's exports would rise again in the following months dominated by manufactured products.

In addition, the increase recorded in the implementation of foreign direct investment has also signalled stronger growth of the manufacturing sector since 2007. Some of the investment projects are expected to come on stream turning out export commodities in 2008 and contriobute to boosting exports of non oil/gas commodities.

Noteworthy was the increase in the FDI in the chemical and pharmaceutical sector. In 2007, implementation of FDI projects in the chemical and pharmaceutical sector was valued at US$ 1,611.7 million, up sharply from only US$264.6 million in the previous year.

There is strong reason to expect that the country will recover from the set back in its internaitonal trade in July. The country is expected to post trade surplus again in the coming months. Surplus is expected in the trade of manufactured goods. he country has a number of highly competitive manufactured goods such as rubber goods, pulp and paper, car tires and motor vehicles.

It is also encouraging to note that banks have shown more confidence in injecting larger funds into the real sector. Amid the global economic slow down, Indonesia banks continue to take big step in credit expansion.