Fresh off-the-tree oil palm fruits at a plantation in Batang Toru subdistrict, South Tapanuli, North Sumatra. (JG Photo/Nur Yasmin)

Moody's Warns of Sharp GDP Drops for Commodity Producers as Coronavirus Outbreak Rages On


FEBRUARY 11, 2020

Jakarta. Indonesia and most commodity-producing countries in the world are facing a potential 0.5 to 1.5 percent cut in their economic growth this year as the fallout from coronavirus outbreak in China continues, rating agency Moody's Investors Service warned on Tuesday. 

Indonesia's massive exports to China make it vulnerable to drops in demand from the world's second-largest economy, which will also affect other commodity producers in Africa, the Gulf and the Asia-Pacific. 


"These exporters will suffer from both slower demand from China and lower prices globally," Moody's said in a report. 

China has reported more than 40,000 cases of the novel coronavirus infection, with the death toll now reaching 1,116. The Chinese government has sealed off several cities, advised their citizens to skip outdoor activities and banned them from traveling abroad. Many of the country's key producers, including carmakers, are using some of their factories to make much-needed health supplies, such as surgical masks and hazmat suits. 

Moody's said the slow economic activities in China has put the prices of some main commodities under pressure. 

Data collected by the agency showed the price of iron ore had fallen 8.2 percent from its January peak. Copper price fell 10.2 percent while Brent crude price dropped 22.6 percent to $53.3 per barrel over the same period. 

"We estimate that, unless demand from China bounces back very quickly, the direct impact of the outbreak on GDP growth for most exposed economies could range between 0.5-1.5 percentage points for every percentage point decline in China's GDP growth," Moody's said. 

"These estimates are based on the value of exports from each country to China. Taking into account the share of foreign value-added in exports – how much a country's exports contain value-added produced in other," the agency said. 

Indonesia, the largest economy in Southeast Asia, barely grew above 5 percent last year as its exports suffered hits from the trade war between the world's two largest economies, the United States and China, while many investments were also postponed due to political and security uncertainties in an election year.

Last year, Indonesia exported $2.4 billion worth of liquefied natural gas, $2.3 billion worth of palm oil, $2.1 billion worth of coal, $959 million worth of nickel ore and $1.8 billion worth of soda to China.  

Aside from machinery and smartphones, Indonesia also imported $530 million worth of garlic and $108 million worth of oranges from China, data from the Central Statistics Agency (BPS) showed.  

The World Bank's new managing director, former Indonesian trade minister Mari Elka Pangestu, said the coronavirus outbreak has been a great reminder that Indonesia must diversify its export destinations and supply chain sources. 

"What's now happening is a supply chain interruption, just like what happened with SARS and the tsunami in Japan," Mari Elka said after a meeting with President Joko "Jokowi" Widodo on Tuesday. She was referring to the severe acute respiratory syndrome in China in 2002 and the Japan tsunami in 2011. 

"We were also left vulnerable then because we relied on only one source. Then we diversified, moving away from Japan. It could be done and we benefited from the move," Mari said. 

"We hope this time the silver lining would be an encouragement for investments that will reduce our dependence on industrial parts from China," Mari said. 

Earlier, the Coordinating Minister for the Economy, Airlangga Hartarto, said the coronavirus outbreak is likely to cause a drop of between 0.1 and 0.29 percentage points in Indonesia's economic growth.

"The current consensus [of economists] is that China's economy would drop by 1 to 2 percentage points because of the coronavirus outbreak. The corresponding drop in Indonesia would be between 0.1 and 0.29 percent," Airlangga said.

Aside from the decline in its commodity exports, Indonesia is also likely to see a sharp drop in Chinese tourists. "Tourism will suffer. Two million Chinese tourists come to Indonesia every year. But since the outbreak began Chinese tourists have stopped coming here," Airlangga said. 

The country closed its borders to all travelers from China on Feb. 2.