FA Policy March

REALIGNING
STRATEGIS with the
REGIONAL ECONOMIES

The long-standing vision of Samudera Indonesia (SI) on “Connecting Indonesia”
requires a constant and continuous assessment whether the theme still aligns
with the progress of Indonesian regional economies.

This first edition of Samudera This finding necessitates some strate-
Indonesia Research Initiatives gic actions to close the gap in the
(SIRI) policy brief emphasizes on future, such as:
this particular aspect. We recap understanding the drivers of eco-
the performances of SI´s nomic growth in each region,
operations during the years opening-up opportunities in the
2017-2018 in comparison with niche markets, and further utilizing
the regional economies. The the
results hint the gaps between SI´s database to monitor the trends, to
performances with the regional capture the business cycles and to
growth rates and the growth of better evaluate the new business
the commercial banks´ credits- models. This brief also illustrates
two indicators we use as some economic trends both at the
benchmarks. macro and national levels.

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Key Messages March 2019

The global volume of trade will be The operations of SI had been
impacted by the moderating growth quite colorful. The areas of
in China economy and particularly operations in Merak, Medan,
in the manufacturing activities. Cikampek, Surabaya & Palaran
Trade barriers and protectionism had all shown their biggest
are also playing roles in slowing competitiveness. However, others
down the growth of trade volume. are left behind vis-à-vis the
The Indonesian macroeconomic regional dynamics.
outlook in 2019 will remain stable Strategies are needed to capture
at a growth rate of 5.2% while the the changing markets both
inflation rate is projected at 3%. domestically and regionally. SI
However, the trade deficit is should remain agile & responsive
looming ahead at 2.6% of GDP. to the disruption in the economy.
Technical and non-technical aspects
are the highlights in the global
shipping industry such as the new
implementation of emission
regulations set by the IMO. The
logistics industry is highlighted by
the emergence of the e-commerce.

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THE GLOBAL
LANDSCAPE

Transportation and logistics Due to new emissions regulations,
industries expect adversities in that will eventually will lead to earli-
the upcoming years ahead er scrapping of older vessels; rates of
(Bloomberg Intelligence, WTO, dry-bulks will possibly increase. The
UNCTAD). In the global marine regional Intra-Asia and Intra-Europe
shipping, there will be two main will be affected the most by the new
issues emerging in 2019 and emission regulations. The small-sized
ahead, the first aspect concerns vessels are not cost effective since
with the impact of the new they have to use a more expensive
emission regulations affecting the compliant fuel. Based on the new
fleets´ operation whereas the IMO 2020 emission regulations, ves-
second aspect concerns with the sels aged 15 years or older will not
increasing sentiment of be competitive and cost effective to
protectionism that negatively be used for operations. Furthermore,
influence the global trade it is predicted that global trade
(Bloomberg Intelligence, 2018; growth will not quickly recover since
Rohman, 2018). the tariff wars are still in place amidst
trade uncertainty that further hinder
the demand side (See Figure 1 on the
Purchasing Manager Index)1.

1 Therefore, an index reading of 50.0 means that the variable is unchanged, a number over 50.0 indicates an improvement,
while anything below 50.0 suggests a decline.

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The Purchasing Managers' Index (PMI) is the indicator that mimics the
demand side of economic activities. It reflects the economic health for the
manufacturing and services sectors. The purpose of the PMI is to provide
information about current business conditions to help decision makers. As the
GDP calculation require a longer term to be recorded, PMI hints ex-ante
economic progresses made by countries.
A current PMI survey
illustrates the decline
of demand side in
big economies in
Asia (except India)
since December
2017. This figure
signals that the
future economic
growth in the region
will not be as high as
years before.

Source: Bloomberg Intelligence (2019), analyzed by SIRI
Figure 1 The Purchaser Manager Index (PM)

The general economic progress can also be foreseen by looking at the
pattern of the Baltic Dry Index.

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Balric Dry Index GDP World GDP Indonesia The Baltic Dry Index
10 10000 (Figure 2)2 measures the
ship transport costs for
5 8000 materials like; iron ore and
GDP growth (annual %) coal, which has fallen by 47
Baltic Dry Index percent since mid-2018,
0 6000 when a trade dispute
between the United States
-5 4000 and China occurred- the
tension between countries
-10 2000 are now slightly decreasing.
This indicator conveys
-15 2000 2005 2010 2015 0 several messages since the
1995 2020 dry-bulk commodities are
taken as a leading
year economic indicator. These
materials are used in core
Source: Bloomberg Intelligence (2019), analyzed by SIRI industrial sectors such as;
steelmaking and power
Figure 1 Long time series of Baltic Dry Index generation. The lower the
indicator, the weaker
economic progress of the
country.

At the same time, the Harpex Shipping Index, which shows the container
rates, had also dropped by 30 percent since Mid-2018. As a measure on the
demand for shipping manufactured goods from producers to consumers,
container rates are also seen as a leading economic indicator. This slump is
attributed to the weakening manufacturing activities in Asia, Europe and
North America (partly shown in Figure 1).

2 The Baltic Dry Index (BDI), is issued daily by the London-based Baltic Exchange.
The BDI is a composite of the Capesize, Panamax and Supramax Timecharter Averages. It is reported around the world as a proxy for
dry bulk shipping stocks as well as a general shipping market bellwether.

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The Chinese economy contributed Moreover, for the case of
to around 40% of the global commodity, like coal, since China
growth economy. A slowing of the consumed around 60% of the
Chinese economy matters the global coal exports, the world coal
most, especially on the global price is also very much correlated
trade. The relationship between with the China`s manufacturing
China and global economy is industry, especially starting 2005
apparent: there is a tight and onwards. This is especially
relationship between markers for visible in Figure 3.
global trade demand (e.g. the
Baltic Dry Freight Index for
shipping) and the China’s
manufacturing activity.

Source: Bloomberg Intelligence (2019), analyzed by SIRI
Figure 3 The relationship between world coal
price & China’s manufacturing value added

From Figure 3, we see a clear pattern of the coal price which is correlated to
the pattern of the China’s industry value added. The two long series are
correlated at about 30%. Moreover, when the time series is reduced to a
period of post-2005, the correlation amounted at a higher rate at 70%.

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On the third-party logistics (3PL), since innovation and e-commerce are
evolving quickly, logistical providers are likely to follow and adapt these
trends to stay competitive and effective. The volume of freight-forwarding
will increase during 2019, mainly driven by e-commerce. It is predicted that
global e-commerce turnover volume will rise by 20% in three years, mainly
driven by the Asia-Pacific region, according to eMarketer. Focusing on
reverse logistics will also be more important in the coming years. Hiding
from people attention, approximately 25% of the e-commerce orders will be
returned. This will create a new business model to grab the returning
packages globally.

INDONESIA’S
MACROECONOMY

The general assessment on Indonesia´s macroeconomic variables such as
growth and inflation are discussed. The inflation rate of Indonesia has
dropped to 2.82% in January 2019 from 3.13% in December 2018 (m-to-m
basis). This is the lowest measured inflation rate since August 2016. The GDP
growth rate of Indonesia fell with -1.69% in January 2019 compared with
3.09% in December 2018 (m-to-m basis) due to a slower moving private
consumption and investments, a decreased amount of net exports, an
increased amount of net imports and an increased amount of government
spending. (TradingEconomics, 2019).

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Moreover, the unemployment To put in perspective, the long-term
rate of Indonesia rose from 5.13% forecasts put Indonesia on a
in January 2018 to 5.34% in relatively stable position with 5.2%
January 2019, whilst the average GDP growth rate in 2019 (Figure 4),
unemployment rate of last 37 4.1% per capita growth rate, and
years contributed to an amount 3.4% inflation rate. Indonesia though
of 6.05%. Although, calculating must battle with the current problem
the exact unemployment rate in regarding the trade account deficits
Indonesia is debatable since amounted at -2.6% in 2019 (Asian
some citizens are not registered Development Bank, 2018).
as working. (TradingEconomics,
2019)

Gross Domestic Product

Indonesia

Source: Asian Development Bank (2018)
Figure 4 Forecasted Indonesian GDP and neighboring ASEAN countries

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ASSESSMENT

For SI, the year of 2018 has passed by marking some achievements whereas
at the same time providing room for improvements. This current edition of
the policy brief focusses on evaluating how good we are compared with the
regional economies. We will establish the comparison using a standard
Gross Domestic Product (GDP) measurement. The GDP is the total monetary
value of finished goods and services within the borders of a country or a
region calculated in a specific period. The common formula to calculate GDP
is
GDP = C + G + I + NX.
Where C stands for personal consumption expenditures, the G stands for
government expenditures and investments, the I is equal to all the
investments being made by the citizens of a country and NX stands for net
exports of a country which can be calculated when deducting the total
exports minus the total imports.
(Amadeo, 2019).
As a common rule of thumb: the lesser developed the country, the greater
portion of C compared with I or NX. In Indonesia the portion of Consump-
tion (C) might reach up to 60% which brings two messages: the country is
less affected directly by the global macroeconomic fluctuation although at
the same time C is less sustainable than I or X as an engine of growth.
Another way to measure the GDP is the income approach calculated by
adding all the wages, profits, rents and interest income to determine the
GDP of a country. (Mathews, 2012).

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Lastly, but a more relevant way for the industry is the production approach
where the GDP can be traced and decomposed into several sectors (mainly
primary, manufacturing and services sectors).

Source: Bank Indonesia (2019), analyzed by SIRI As shown in Figure 5 the
Figure 5 GDP of Indonesia by Industry Indonesia´s GDP is mainly
driven by the
manufacturing &
agricultural sector. The
transportation sector
comprises 7% of the total
GDP by which the
air-transport, land-
transport & warehousing
are the major
contributors. The
sea-transport contributes
less amounted at only
0.3% of total GDP.

In Figure 6, we will see the relative performance of SI in comparison with
the provincial growth rates. We can observe three groups of SI: those who
are competitive against the region, those who are just slightly below the
growth rate and the last group who are quite far left behind.

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Source: Samudera Indonesia Report (2019), analyzed by SIRI
Figure 6 SI performance by region against regional growth rates

Figure 6 depicts that regions such as Merak, Medan, Jakarta, Palembang,
Surabaya, Cikampek and Palaran have all outgrown the regional growth
rates. These regions should maintain the performance to say the least.
On the other hand, the second group: Cirebon, Padang, Semarang,
Bandung, Batam, and Makassar, are slightly below the growth rate. In
these regions, drastic reforms might not be needed as the gap is not very
big. They must really focus on monitoring their strengths and find the
competitive advantages against the peers in the industry. On the last
group consisting Pekanbaru, Banjarmasin, Balikpapan, Pontianak,
Denpasar and Tayan, major strategic changes are required. Among the
focus is to see the feasibility of our branch in that area and to find the
new business models.
The data-driven and evidence-based analysis can be used to give the
direction and the way forward. SIRI has provided a regional economic
outlook (dashboard) that might give some hints (not in exhaustive
exposition) on the drivers of economic growth, exports and commercial
bank credits where SI operations can focus on. Please refer to this slide for
more detail analysis.

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CONCLUSION

This first edition of the policy We witness divergent outcome
brief illustrates that trade of SI operations across regions.
activities might be impacted by The area of operations inMerak,
the China moderation in growth Medan, Cikampek, Surabaya
& manufacturing sector. We also and Palaran are identified to be
notice that the trade barriers & competitive. However, others
protectionism are also playing are left behind vis-à-vis regional
role therefore trade volume economy. Thus, strategies are
might be deteriorated in the needed to capture the new
next couple of years. market domestically and
The Indonesian macroeconomic regionally.
outlook remains stable. The Apart from looking the regional
Indonesian growth rate is economy as domestic
projected to be around 5.2% and Indonesia, we can also
inflation rate is about 3%. strategize on the regional
However, the trade deficit is ASEAN market. Therefore, the
looming at 2.6% of GDP in 2019. focus might go on countries
where the economy is still less
developed. For this reason, the
ASEAN four consisting the
newest ASEAN countries
(Cambodia, Laos,Myanmar and
Vietnam) are the new engine of
growth in the region. SI should
see this market to see the
opportunities in the future.

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Source: ASEAN statistics (2019), analyzed by SIRI
Figure 7 Comparison of ASEAN growth rate

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Intra ASEAN top 20 commodities (million US $)

Source: ASEAN statistics (2019), analyzed by SIRI
Figure 8 Intra-ASEAN trade

Furthermore, one way among several strategies is to investigate
intra-ASEAN trade pattern. The following Figure 8 helped us to
understand the current pattern of goods traded in the ASEAN market.
Thus, beyond positioning as a middleman, SI must search both the
demand and supply of these goods which are traded in the region.

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Authors

Ibrahim Rohman is Head of Samudera Indonesia Research
Initiatives (SIRI). Previously, he worked at LPEM-FEUI
(2002-2008), Chalmers University of Technology, Sweden
(2008-2013) including some works and projects with the
European Investment Bank, NTT DoCoMo, the Deutsche
Telekom, Ericsson and Arthur D. Little. Later he worked at the
European Commission (2013-2016) and the United Nations
University (2016-2017). He earns bachelor and master’s degree
in economics from the University of Indonesia and a PhD in
Technology Management and Economics from Chalmers
University of Technology, Gothenburg, Sweden.

Max van Meurs is currently doing his thesis at Samudera Indonesia
Research Initiatives (SIRI). Previously, he did his internship in

Bangkok at Samudera Traffic Co., Ltd. When successfully finishing his
thesis at SIRI, he will earn a bachelor’s degree in international
business and Management Studies as well as his minor in

International Logistics and Supply Chain Management from the
Rotterdam University of Applied Sciences.

FURTHER AGENDA

As we have witnessed that the competition in the transportation and logistics industries
is very competitive, we believe that decision making in the industry should be based on
the data. SIRI strives to increase the awareness on using database as the rationale in the
decision-making process. We will conduct a workshop on understanding the data and
business cycle using (but not to) the Bloomberg Intelligence serve basis. The tentative
date is the 1st week of April 2019.

For any inquiries: [email protected]//+62-21-5480088

Samudera Indonesia Research Initiatives (SiRi)
Samudera Indonesia Building, 7th Fl.
Jl. Letjen S. Parman Kav. 35
Jakarta 11480 - Indonesia

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