INDONESIA RIDES THE COMMODITIES BOOM

UNCLAS SECTION 01 OF 03 JAKARTA 000309 SIPDIS SENSITIVE SIPDIS DEPT FOR EAP/MTS AND EB/IFD/OMA TREASURY FOR IA-SETH SEARLS COMMERCE FOR 4430/GOLIKE DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR FINEMAN DEPARTMENT PASS EXIM BANK E.O. 12598: N/A TAGS: EFIN EINV ECON PGOV ID SUBJECT: INDONESIA RIDES THE COMMODITIES BOOM ¶1. (SBU) Summary. Indonesia's exports soared for the first time to over $100 billion in 2006, underpinning respectable gross domestic product (GDP) growth of 5.5% for the year. A 19% rise in non-oil and gas exports, particularly commodities, over the first 11 months of 2006 drove the country's strong export performance. Closer analysis of Indonesia's trade data, however, indicates that 2006's non-oil export boom largely resulted from high world commodity prices rather than significant increases in export volumes, with rising garment exports to Japan and the EU a modest exception. Exports of Indonesia's top manufactured goods have remained flat or declined, and the country's unemployment figures were stagnant at 10.3 percent in 2005-2006. In the short term, Indonesia can likely depend on continuing strength in global commodity prices to support solid export-led GDP growth. In the longer term, though, limited new investment in manufacturing facilities and growing infrastructure bottlenecks may prevent Indonesia from sustaining its strong export performance and relatively high level of GDP growth if commodity prices flatten out. Should commodity prices falter, stubbornly high unemployment levels will likely place a spotlight on the GOI's investment climate reforms and their success in boosting Indonesia's manufacturing sector. End Summary. Commodity Exports Drive Growth in 2006 -------------- ¶2. (U) Indonesia's gross domestic product (GDP) rose an estimated 5.5% year-on-year (YoY) in 2006, in large part due to strong growth in exports and relatively limited expansion of imports. Total exports in 2006 rose 17.6 percent YoY, and growth in net exports (based on average quarterly contributions for the first nine months) comprised approximately 45% of total GDP growth. By the same calculations, growth in investment accounted for less than 4% of GDP growth on average over the same period. Initial data for 2006 suggest that Indonesia's total export value exceeded $100 billion in 2006, up sharply from the $61 billion just three years ago. ¶3. (U) While Indonesia's oil and gas exports increased 10.9% (YoY) during the first 11 months of 2006, the rapid increase in non-oil exports, particularly commodities, drove Indonesia's strong export performance. As illustrated in Table 1, strong growth in commodity exports led the non-oil export expansion, particularly rubber and rubber products, copper, coal, ash residue and palm oil, which grew between 17% and 60%(YoY) during the January to November 2006 period. Exports of paper and knitted garments also performed well during in 2006, increasing 22% and 18%,(YoY),respectively, during the first three quarters of 2006. (Note: Data for paper and knitted garment exports in October and November are not yet available. End note.) ¶4. (U) In contrast, growth in manufacturing exports over the same period stalled. Shipments of electronic tools and appliances, Indonesia's top categories of manufactured goods exports, fell 0.2% year to date through the end of November, and machinery and mechanical tool exports slumped almost 4% percent over the same period. Most analysts attribute the weak manufacturing export performance to low levels of new investment and infrastructure bottlenecks. -------------- -------------- Table 1: Top Non-oil and Gas Exports -------------- -------------- Jan-Nov Jan-Nov Pct 2006 2005 Change -------------- -------------- Electronics 6.7 6.7 -0.2 Coal 5.9 4.2 31.4 Palm Oil 5.3 4.5 16.7 Rubber 5.2 3.2 59.9 Ash/Residue 4.2 3.0 42.0 Machinery/Tools 4.0 4.1 -3.6 Garment(not knitted) 3.1 2.8 10.5 Wood/Wood Products 3.0 2.8 5.3 Copper 1.8 1.1 60.5 Chemical Organic 1.7 1.4 21.3 -------------- --- Total Non-oil/Gas Exports 71.9 60.1 19.6 -------------- --- Source: Ministry of Trade JAKARTA 00000309 002 OF 003 Price Effects Drive Commodity Export Growth -------------- ¶5. (U) Indonesia's export boom largely has resulted from rising world commodity prices, driven by strong demand for commodities from China and the developed world, rather than from an increase in export volumes. An assessment of rubber, palm oil, cooper ore, and nickel ore export values and volumes reveals that, during the first three quarters of 2006, export values of these commodities rose significantly more rapidly than volumes (YoY). For example, during the first three quarter of 2006 the value of rubber exports rose 85% (YoY) compared to a 33% (YoY) increase in export volumes. Similarly, the value of crude palm oil exports increased 12% (YoY) over the same period, while volumes of crude palm oil exports rose by roughly half that amount. In the case of metals, the value of cooper and nickel ore rose 12% and 4.5% (YoY),respectively, over the same period, but the volume of these exports declined 19% and 46% (YoY),respectively. (Note: We based YoY comparisons on actual figures for 2006 and estimated figures for 2005, using 75% of total 2005 export value and volume figures as a proxy for actual January to September 2005 figures. This likely provides a conservative estimate of YoY increases given that commodity export values and volumes generally stay constant or increase during the fourth quarter. Volume data for coal exports in 2006 were not available. End note.) Commodity Exports to China Continue to Expand Rapidly -------------- -------------- ¶6. (U) As illustrated in Table 2, non-oil and gas exports to China continued to increase rapidly during the first eleven months of 2006, rising 36% (YoY). Non-oil and gas exports to Korea and Australia also rose rapidly, at 41% and 40%, respectively, albeit from a lower base. A rapid increase in commodity exports to China comprised the bulk of the increase in total Indonesian non-oil exports to that country. Data on growth in Indonesian commodity exports to China during the first three quarter of the year reveal that the value of rubber and palm oil exports to China increased 148% and 97% percent (YoY),respectively. Conversely, wood and wood product exports to China decreased slightly during the first three quarters of 2006 on a YoY basis, in line with slower overall growth in Indonesian wood exports. (Note: 2005 direction of trade data for other commodity categories currently is not available. In addition, the value of 2005 commodity exports to China used in this calculation is 75% of total 2005 figures, reflecting the data limitations described in the previous section. End note.) ¶7. (U) Japan, the European Union (EU) and the United States remained Indonesia's three largest export destinations through the first 11 months of 2006, with exports to those areas increasing a healthy 25%, 16%, and 14%, respectively. Growth in both commodity and manufacturing exports (particularly garment exports) drove the expansion of trade with these trading partners. As indicated in Table 2, growth in Indonesia's exports to Japan, the EU, the US and China accounted for 53% of the country's total non-oil export growth. -------------- -------------- Table 2: 2006 Direction of Trade, $ billions -------------- -------------- Jan-Nov Jan-Nov YoY Pct Growth 2006 2005 Change Contrib* -------------- -------------- Japan 10.9 8.7 25 19 European Union 10.7 9.2 16 13 United States 9.8 8.6 14 10 Singapore 7.1 6.4 11 6 China 4.9 3.6 36 11 Malaysia 3.5 2.9 21 5 Korea 3.1 2.2 41 8 Taiwan 2.1 1.6 31 4 Australia 1.4 1.0 40 4 Other 18.4 15.9 16 21 -------------- -------------- Total 71.9 60.1 20 100 -------------- -------------- * Percentage contribution to total non-oil export growth rate. Source: Ministry of Trade JAKARTA 00000309 003 OF 003 Export Performance in Line with Regional Competitors -------------- -------------- ¶8. (U) Indonesia's export growth is largely in line with regional competitors, such as Malaysia, Thailand, the Philippines, and Singapore, but lags regional economic giants China and India. According to Citigroup, total exports from Malaysia, Thailand, the Philippines and Singapore will grow in an estimated range of 13-16% (YoY) in 2006, slightly below Indonesia's 17.6% export growth this year. Looking more closely at data for Malaysia, one of Indonesia's closest competitors in terms of export composition, Indonesia's non-oil and gas exports again compare favorably, growing over 19% (YoY) during the first 11 months of 2006, in contrast to 10% (YoY) growth in Malaysia. However, Malaysia outperformed Indonesia in terms of exports of electronic goods, with Malaysian electronic exports expanding 7% YoY during the January to November period, compared to the 0.2% contraction in electronics exports in Indonesia. As state above, Indonesia's export performance significantly lags that of China and India, where analysts expect exports to expand by 25% or more (YoY) in 2006. Comment: Export Growth a Blessing and a Curse -------------- ¶9. (SBU) Despite record exports and respectable GDP growth in 2006, Indonesia's open unemployment rate has remained stagnant at 10.3 percent throughout 2005 and 2006. In the short term, rising world commodity prices will likely continue to support export and GDP growth in Indonesia. Surging demand for basic commodities from China and other emerging markets has shown no signs of abating to date, and demand for crude palm oil and other biofuel feedstocks is rising in the EU and other developed country markets. In the longer term, however, continuing low levels of investment in Indonesia's manufacturing sector and growing infrastructure bottlenecks will likely limit Indonesia's ability to maintain current export and GDP growth levels if commodity prices flatten out. If or when this happens, it will be all the more important for the GOI to have put in place meaningful reforms making the investment climate more transparent and competitive. PASCOE