With China’s economic growth slowing to 7.3 percent year-on-year (y/y) in the third quarter of 2014, Indonesian exports will be affected as China is one of Indonesia’s most important trading partners. Prior to the release of China’s Q3-2014 GDP growth result, the outgoing government of Indonesia had already trimmed its export target for 2014 as global commodity prices have still not picked up. In fact prices of palm oil, coal, rubber, copper and iron ore have fallen in the first three quarters of 2014 according to Indonesian government data.
The main reason behind the declining commodity prices is the sluggish global economy. The outgoing Indonesian government expects exports to rise 0.9 percent to USD $184.3 billion only in 2014 instead of the initial projection of a 4.1 percent increase to USD $190 billion.
As commodities account for around 60 percent of Indonesia’s total exports the country is highly susceptible to the effects of volatility in global commodity prices. This can be positive in times of rising commodity prices (such as the 2000s commodities boom) but negative in times of falling prices. For this reason Indonesia has been eager to transform from an economy relying on raw commodity exports to one that relies on exports of semi-finished or finished products. However, this will still need much time and investments.
In the January-September 2014 period, prices of crude palm oil (CPO) fell 21.70 percent to USD $726.70 per ton, rubber prices fell 28.79 percent to USD $1,588.2 per ton, coal prices declined 15.46 percent to USD $66.4 per ton, while prices of copper and iron ore fell 5.75 percent and 35.7 percent to USD $6,872.2 and USD $82.4 per ton, respectively.
The resulting weaker export performance hurts Indonesia’s economic expansion, which fell to a disappointing 5.12 percentage point growth in the second quarter of 2014, the slowest quarterly growth pace since 2009. It is likely that commodity prices will continue to decline in the fourth quarter of 2014 as the global economy, including China's economy, is sluggish. In September, the World Trade Organization (WTO) predicted that global trade in goods may only expand 3.1 percent in 2014. This forecast is considerably lower than the institution’s 4.7 percent estimate in April 2014. Similarly, the WTO downgraded its forecast for global trade in 2015 from 5.3 percent to 4 percent (which is also much lower than the historic average of 5.2 percent in the past 20 years).