Indonesia may benefit more from China's economic recovery than the US's: report

INDONESIA could reap a boost in foreign direct investment (FDI) and exports as the United States and China move towards economic recovery on the back of successful vaccine rollouts, says a report by UOB.

Indonesia ranked 12th among China's top FDI destinations, with a total investment of US$12.6 billion, UOB's report noted. The country is, however, only in 33rd place on the US' list.

The report, authored by the bank's Jakarta-based economist Enrico Tanuwidjaja, said: "This might imply to some extent that China may have a greater focus on Indonesia than the US does."

It added that the US has had a stronger interest in investing in European countries, with an investment position of 60 per cent, compared with 16 per cent for countries in the Asia-Pacific region.

The US has been concentrating its FDI predominantly in the mining sector so far, with US investment in this sector representing 82.8 per cent of its total FDI to Indonesia, UOB noted.

In contrast, China has been investing heavily in a diversity of sectors. It is Indonesia's main trading partner, accounting for 17 per cent of Indonesia's total exports in 2019. The US, on the other hand, is Indonesia's second main export destination, taking up 11 per cent of Indonesia total exports.

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"Therefore, economic recovery for both China and US will bring about potential benefits to Indonesia, which may give the much-needed tailwind for our economic recovery out of the pandemic crisis," the bank said.

Indonesia's exports fell by 5.5 per cent throughout the first three quarters of 2020, UOB noted; factories were operating "far below maximum capacity" due to lockdowns and their adverse implication on the global value chains.

Even so, Indonesia's exports to China and the US grew by 15.6 per cent and 4.6 per cent respectively in 2020 alone. Exports shrank by 2.3 per cent for the full year.

Among Indonesia's top exports to China are "natural products" like coal, animal or vegetable fats and oils and iron and steel, leading UOB economists to believe that Indonesia is likely to benefit from China's recovery more so than from that of the US.

In addition, China has effectively ended imports of coal from Australia as part of an ongoing political dispute, which means Indonesia could be filling the gap instead. UOB noted that this had led to a 50.5 per cent year on year growth in Indonesian exports to China for the first two months of 2021.

Although exports to the US grew during the same period, the pace was much slower than that of China.

UOB said this is because unlike exports to China, Indonesia's top exports to the US are man-made products such as clothes, footwear, electrical machinery and equipment and furniture.

Regardless, the rebound in exports is expected to continue, UOB said, and this could lead to the first positive exports annual growth since 2018.

The bank added that there should not be a "significant barrier" for Indonesia to enjoy the spillover effects from the US and China's economic recovery thanks to several free-trade agreements already in place.