MacroInsight / Click here for full PDF version
Author(s): Luthfi Ridho ; Axel Azriel
- Trump had imposed an additional 10% tariffs towards China. Our simulation suggests Indonesia trade activity may decline by c.5-8% yoy.
- However, tariffs may bring FDI opportunities to Indonesia. Our simulation indicates stable FDI at c.+US$0.8bn Y+1 after tariff implementation.
- For now, we keep our GDP expectation at c.+5.2% in FY25.
Adverse impact of increased US tariffs to China
On 1st Feb25, President Trump had issued an official executive order to impose an additional 10% tariffs for all goods from China (Mexico & Canada in page 6-7). Given China and US large exposure in the global economy (10-11% each of total global trade), we believe the increased trade tension will have an adverse impact to the world trade. We use SVAR model to assess the economic impact of this tariff to Indonesia. In general, the imposed tariffs shall bring adverse impact in the 5th quarter (one year later), where: (1) world trade may contract by 1-2% annually, (2) Indonesia's exports and imports contracted by 3-8% yoy which shall impact Indonesia's GDP by -0.6% annually, and (4) commodity price will likely drop by 8% yoy, ceteris paribus . (see fig. 1)
Opportunities from trade diversion and positive FDI
In response, China has also imposed 10-15% tariffs towards US goods, including coal and oil & gas. This retaliation shall present a possibility for a trade diversion. Optimistically, China demand on US coal may be diverted to Indonesia. By far, China is the largest coal importer from Indonesia at US$6.9bn in FY23 (55% of China's total coal imports in FY23). Moreover, our model surprisingly suggests sustainable incoming FDI to Indonesia. One year post the tariff implementation, our model estimates a FDI inflow of US$0.8bn. In the trade tension event in FY18, FDI flows from China/Japan/Singapore to Indonesia rose by +70%/+45%/+10% yoy to +US$4bn/+US$6bn/+US$10bn aiming for electronics and steel sectors. The FDI was to set-up new plants/factories for exports, suggesting the empirical evidence of factory reallocation activities.
Higher trade activity with BRICS membership; expect GDP growth at c.5.2% in FY25
Indonesia officially became the 10th BRICS member as of 6Jan25. The BRICS countries now represent 47.2% of the global population and 27% of the world's GDP. We view that the benefit from the membership includes: 1) increase in trade activity within BRICS members, 2) higher trade diversification beyond Asia-Pacific region and 3) potential access to the New Development Bank (NDB) to fund Indonesia's key government projects. Overall, we see both the US trade policies and the BRICS membership may bring a positive impact to Indonesia macroeconomic stability. We expect higher GDP growth at c.+5.2% in FY25F and c.+5.4% FY26F. We believe the main source of growth is from investment that will grow higher at c.+4.8% in FY25F from +4.6% in FY24 post political year uncertainty.
Sumber : IPS
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