Indonesia Economic Update Report

During the first quarter, the country could still maintain the positive trend of its trade surplus with a total value of USD 7.41 billion. This achievement meant that Indonesia has recorded a trade surplus for 47 consecutive months since May 2020, and should the country extend its performance to April, the government will match the longest surplus record from the late 70s to early 80s. Regardless, the exports from Indonesia experienced a slight decline, so the trade surplus has narrowed. The export component contributes 21.37% to Indonesia’s economic growth structure.

Based on destination country, non-oil and gas exports to China, the United States and India remain the main contributors to Indonesia’s exports; however, Indonesia’s non-oil and gas export performance to China – as the main destination country – in the first quarter of 2024 fell sharply by 16.24% compared to the same period the previous year. Nevertheless, exports to China still contributed the most to Indonesia’s export performance, with 22.91%. Regarding the overall destination country-based export contribution, China represented 22.91%, followed by the US and India with 10.78% and 8.73%, respectively. At the regional level, ASEAN and the EU contributed 17.39% and 7.34%.

In the past, commodities such as coal and crude palm oil greatly influenced Indonesia’s trade performance. However, the surplus trade balance has continued due to nickel downstream factors. With the expansion of the downstream policy, the country expects to add value by extending the supply chain, thus creating diversification in export products. This policy is projected to maintain the momentum of trade surplus performance in the future.

To avoid the risk of an economic slowdown in countries that have been export destinations, such as China, the government is also considering diversification by promoting exports to other countries. The government has selected 12 new export priority markets, such as: Saudi Arabia, Netherlands, Brazil, Chile, China, Philippines, India, Kenya, South Korea, Mexico, United Arab Emirates, and Vietnam. While the top priority export products are as follows: fish and processed fish, processed coconut and coconut, processed coffee and spices, vegetable ingredients and margarine, cocoa, processed food, cement, chemical products, rubber and rubber products, leather and leather products, pulp and paper, textiles and footwear, precious metals and jewelry, electronics, automotive, furniture, toys, etc.

The Indonesia-European Union Comprehensive Economic Partnership Agreement (IEU CEPA) marks a significant development in the economic relations between Indonesia and the European Union. Negotiations for this extensive trade deal commenced in 2016, with the shared objective of bolstering bilateral trade and investment opportunities while addressing assorted challenges and barriers. As a contextual backdrop, Indonesia-EU trade reached USD 30.8 billion in 2023, with Indonesia’s exports to the EU valued at USD 16.7 billion and imports from the EU totalling USD 14.1 billion.

A primary aim of the IEU CEPA is to foster economic cooperation and fortify trade and investment ties between Indonesia and EU member states. The agreement encompasses various sectors, including trade in goods and services, investment, intellectual property rights, competition policy, and sustainable development.

Throughout the negotiation process, Indonesia and the EU have engaged in constructive dialogues to tackle diverse trade barriers and challenges. These discussions have centred on issues such as market access, tariffs, non-tariff barriers, and regulatory disparities. Notably, the 17th negotiation round of the IEU CEPA, which occurred earlier this year, underscored the significance of addressing trade barriers to facilitate smoother trade flows between the two parties. The agenda for the latest negotiation round encompassed a wide array of topics, ranging from trade in goods and services to technical barriers to trade and intellectual property.

A notable point of contention in the negotiation process has been the European Union’s stance on certain trade-related matters. Indonesia has advocated for fair treatment from the EU, stressing the necessity for equitable and mutually advantageous terms in the agreement. Ensuring fair terms has been imperative for Indonesia to safeguard its interests within the framework of the IEU CEPA. The issue of the EU’s Deforestation-Free Regulation (EUDR) has been particularly contentious. However, the business community in Indonesia has pushed for negotiations on the EUDR to be separated from those related to the IEU CEPA.

Moreover, the European Union has raised objections regarding two of Indonesia’s key commodities, nickel, and palm oil, at the World Trade Organization (WTO). Disputes emerged over Indonesia’s ban on nickel ore exports and the EU’s classification of palm oil as high-risk for deforestation, which Indonesia perceives as discriminatory. This has adversely impacted Indonesia’s export position for palm oil. Indonesia has expressed concerns about perceived mistreatment, particularly given the smoother resolution of similar issues in other agreements, such as the Indonesia-EFTA Comprehensive Economic Partnership Agreement.

Despite the inherent challenges and complexities in the negotiation process, Indonesia and the EU remain committed to achieving a mutually beneficial agreement. The IEU CEPA harbours the potential to unlock fresh avenues for trade and investment between the two parties, fostering heightened economic growth and prosperity. With 11 out of 20 chapters already accepted, both parties are optimistic about concluding the agreement soon while the remaining unfinished topics are under negotiation. The Indonesian government has set a target for concluding the IEU-CEPA this year before any impending governmental changes.

This report was compiled with contributions from the team of business experts in our Indonesia office.

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