Coal’s slide poses broader risks for Indonesia

September 11, 2012

By Wayne Arnold

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Coal’s slide poses a problem for Indonesia. As the biggest exporter of coal used for generating power, the country’s fortunes might seem directly tied to China and India’s economic slowdown. In fact, exports account for only a sliver of GDP. The bigger risk is that falling demand spooks foreign investors, undermines a provincial boom, and hurts poor workers.

It’s tempting to see coal as king in Southeast Asia’s largest economy. Indonesia exported 309 million metric tons of the stuff in 2011, according to the World Coal Association, making it the world’s largest exporter of the thermal coal that powers Chinese and Indian power. Slowing demand meant Indonesian coal exports fell 13 percent from May to June.

However, the link to Indonesia’s economic fortunes is not straightforward. Coal accounts for only about 14 percent of Indonesia’s exports and 4.4 percent of GDP. A 30 percent increase in foreign direct investment in the second quarter suggests the country’s growing population and rising incomes remain compelling.

Even so, coal’s roughly 20 percent slide this year could deal a short-term blow. Falling exports have helped push Indonesia’s current account to a deficit equivalent to 3.1 percent of GDP in the second quarter. Even though demand for heavy machinery and equipment has eased too, imports are still growing. That’s putting downward pressure on the currency, the rupiah, which could undermine foreign demand for Indonesian stocks and bonds.

And while Indonesia’s banks appear to have relatively little exposure to the commodities sector, the resources boom does seem to have sparked credit bubbles in some mining boomtowns. Smaller miners have borrowed to buy ships and property, while workers have borrowed to buy motorcycles. In June, Indonesia’s central bank imposed a 30 percent minimum down-payment for motorcycles; sales last month fell 37 percent.

Falling prices for coal and other commodities could reverse the spread of wealth to Indonesia’s poor provinces. With the country already gearing up for elections in 2014, that could accelerate rising calls for populist remedies such as higher minimum wages – or grabbing a greater share of the profit from mines and other foreign investments. Coal may not be king in Indonesia; but it could still prove a joker.

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