20180419-大华银行-Macro_Note__Indonesia__Minimal_Impact_From_US-China_Trade_Tensions,_But_Wary_About_Asset_Market_Implications_10页_349kb

Summary of Indonesia's Trade and Asset Market Implications from US-China Trade Tensions

Core Content

This macro note discusses the impact of escalating US-China trade tensions on Indonesia's external trade and asset markets. It highlights that while the direct effect of US tariffs on aluminum and steel is minimal, the indirect effects through China's retaliatory measures may pose some risks. The note also emphasizes the potential volatility in Indonesia's asset markets due to global risk aversion.

Main Points

Trade Implications

• US-China Trade Tensions: The imposition of tariffs by the US on aluminum (10%) and steel (25%) and subsequent retaliatory measures by China have created market uncertainty.
• Indonesia's Trade with the US: Indonesia's exports to the US are not significantly affected by the tariffs, as they are mainly composed of non-metallic goods. The share of Indonesia's iron, steel, and aluminum exports to the US is small (around 4.7% for iron and steel, and 1% for aluminum), and the trade surplus with the US is minimal.
• Indonesia's Trade with China: China is Indonesia's largest trade partner, with a total trade value of USD64.3bn in 2017. Indonesia exports a significant portion of its iron and steel to China (47%), while it also imports a large share of finished iron and steel products from China (26%).
• Impact on Indonesian Exports: Although the direct impact of US tariffs is limited, the indirect impact through China's retaliatory measures may affect Indonesia's iron and steel processing industries. The collapse of Indonesia's aluminum exports post-2014 due to the mining law also limits the impact of tariffs on aluminum.
• Overall Trade Exposure: Only 2.6% of Indonesia's total exports (USD190bn in 2017) are exposed to the ongoing trade tensions, with the impact being even smaller when focusing only on trade with the US and China (1.3%).

Asset Market Implications

• Market Volatility: Indonesian stocks and bonds have experienced sell-offs in line with global market reactions to the trade tensions.
• Rupiah and Currency Risk: There is a risk that the rupiah could be adversely affected if China retaliates via currency markets. A correlation is observed between the volatility of the IDR and CNY.
• Sovereign Bond Market: The 10Y IDR-denominated sovereign bond yield has risen, while foreign ownership has declined, indicating investor caution.
• Investor Sentiment: The rising trade tensions have led to a more risk-averse environment, affecting asset markets globally, including Indonesia.

Key Information

• Event Timeline: The note provides a timeline of key events in the US-China trade tensions, starting from March 2018 with the announcement of tariffs on steel and aluminum, through retaliatory measures by China, and the subsequent diplomatic efforts and WTO consultations.
• Trade Data: Detailed trade data shows that Indonesia's exports to the US are mainly in non-metallic goods, while its exports to China are dominated by raw and semi-finished iron and steel.
• Economic Forecast: The forecast for Indonesia's 2018 GDP growth remains at 5.3%, with inflation expected at 4.0%, despite ongoing trade tensions.
• Monetary Policy Outlook: The note suggests that Bank Indonesia may hike interest rates by 25bps in Q4 2018 to bring the benchmark rate to 4.50%, to counter inflationary pressures and a rising rate environment.

Conclusion

• Minimal Direct Impact: Based on trade data analysis, the direct impact of US-China trade tensions on Indonesia's external trade is minimal.
• Indirect Risks: Indirect risks from China's retaliatory measures and global market volatility may affect Indonesia's asset markets.
• Economic Resilience: Despite the risks, Indonesia's improving external position and sound macroeconomic fundamentals suggest it can better cushion the effects of external shocks.
• Need for Monitoring: Continued monitoring of trade tensions and potential policy interventions is recommended to manage risks effectively.

Recent Publications

• China: PBoC cut reserve requirement ratio, economic growth in line with expectations.
• Malaysia: Inflation edged lower to 1.3% in March.
• Japan: March trade surplus increased due to declining imports.
• Singapore: Second consecutive month of NODX contraction.
• Indonesia: Trade balance returned to a huge surplus.

Disclaimer

This document is for informational purposes only and does not constitute investment advice. It is not an offer, recommendation, or solicitation to buy or sell any investment product. The views expressed are those of the authors and do not reflect the views of the UOB Group. The information is based on public sources and may change with new developments.