Global Economic Slowdown and Commodity Price Decline Affect Indonesia's Industrial Confidence

INTI- Jakarta, The global economic slowdown since the end of 2022, interest rate hikes, and declining prices of main export commodities have started to impact domestic consumer purchasing power. This is evident in the three-month ahead Sales Expectation Index (second quarter) which saw a decline. The Bank Indonesia Retail Sales Survey for April 2023 stood at 129.8, a decrease of 24.38 points compared to the same period in 2022. These conditions have also affected the Industrial Confidence Index (IKI) in May 2023, with a slower expansion.

"The May 2023 Industrial Confidence Index (IKI) reached 50.9, still in the expansion zone, although it slowed by 0.48 points compared to April 2023," said Febri Hendri Antoni Arif, the spokesperson for the Ministry of Industry (Kemenperin), during the release of the May 2023 IKI in Jakarta on Wednesday (May 31).

The slowdown in the May 2023 IKI was influenced by the contraction of several sub-sectors that were previously expanding. This contraction was observed in the Tobacco Processing Industry, Paper and Paper Products Industry, Printing and Recorded Media Reproduction Industry, Pharmaceutical and Traditional Medicine Industry, and the Basic Metals Industry. As a result, the share of expanding sub-sectors in the non-oil and gas Manufacturing Gross Domestic Product (GDP) for the first quarter of 2023 decreased to 70.6%. This share came from 12 sub-sectors that experienced expansion.

Febri explained that the decline in IKI was caused by the contraction of several sub-sectors with significant shares of the GDP, which had previously been expanding, such as the Basic Metals Industry and the Tobacco Processing Industry. Secondly, the decline in exports due to commodity price decreases and the weakening of the rupiah exchange rate. "Thirdly, there are still inventory stocks from April due to a decrease in consumer purchasing power during the Eid al-Fitr holiday, unlike in previous years," said Febri.

Nevertheless, some sub-sectors with the largest share of GDP continued to expand, including the Food Industry, Chemical and Chemical Products Industry, and the Motor Vehicles, Trailers, and Semi-Trailers Industry. "For June 2023, the Ministry of Industry is optimistic that the IKI will increase again," added Febri.

Upon closer examination, the decline in the May 2023 IKI was due to a decrease in the value of the New Orders variable by 0.73 points (to 49.84) and a decrease in the Production variable by 2.07 points (to 50.01). On the other hand, the Inventory variable experienced an increase of 2.67 points (to 54.90). These conditions indicate a buildup of inventory, leading companies to reduce production alongside a decrease in orders. Domestic orders still remain the dominant factor influencing the New Orders variable index.

"The majority of business players stated that the overall business conditions in May 2023 were stable, with 44.8% reporting stability and 28.1% reporting increased business activities compared to April 2023," added Febri. Although this condition slightly decreased compared to April 2023, the level of optimism among business players regarding the next six months significantly increased.

In May, 66.2% of business players expressed optimism about the business conditions in the next six months. This figure increased compared to the previous month's 64.7% and reached the highest value since the launch of the IKI. The majority of respondents who expressed optimism cited their belief in an improved market condition and their confidence in the government's better policies. Meanwhile, 9.0% of business players remained pessimistic about the business conditions in the next six months. This figure is also the lowest since the launch of the IKI in November 2022.

"If we look at the IKI values per sub-sector, the Basic Metals Industry contracted in May after consistently being in the expansion phase. This condition was influenced by the global economic growth in the first quarter of 2023, which was 2.8%, a decrease of 0.5% compared to 2022 (3.3%), and the decline in metal commodity prices. Additionally, the non-operation of one of the major metal companies disrupted the supply chain in the basic metals industry, resulting in contraction," explained Liliek Widodo, Director of the Metal Industry at the Ministry of Industry.

A similar situation occurred in the Tobacco Processing Industry, which contracted in May after previously being in the expansion phase. This was due to a decrease in sales of class I cigarettes (machine-rolled and hand-rolled cigarettes), although sales of class II cigarettes increased by 20%. Class I cigarettes are the main product in this industry. The Ministry of Industry predicts that production will increase again in June.

Regarding the Textile Industry, the Bank Indonesia Consumer Confidence Index for April showed an improvement. Therefore, although still contracting, the Textile Industry, Textile Products, and Footwear Industry experienced some production boost due to the momentum of the Eid al-Fitr holiday. However, this sub-sector is highly vulnerable to the European Union market conditions, and the inflation and interest rate hikes in the European Union have caused consumers to withhold purchases. "This not only happens in Indonesia but also in countries like Bangladesh, Vietnam, and Thailand. In relation to the conditions of these three sub-sectors, which have been contracting, the Ministry of Industry has conducted business matching in the United States and strives to maintain domestic consumption," said Adie Rochmanto Pandiangan, Director of the Textile, Leather, and Footwear Industry at the Ministry of Industry.

Regarding the Pharmaceutical Industry, Chemical and Traditional Medicine Products, which experienced contraction, Saiful Bahri, Director of Downstream Chemical and Pharmaceutical Industry at the Ministry of Industry, explained that this market segment is quite sensitive, and its production has been optimized in the previous month. Additionally, the market for these products is dominated by the government. Changes in service processes in hospitals with the implementation of an integrated e-prescription system resulted in outpatients only receiving medicines from the hospital's pharmacy department. This has led to a decrease in retail sales at pharmacies/drugstores, which in turn affects the decline in new orders for this sub-sector. ***.Hans