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Indonesia: Selected Issues

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
March 2015
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The Impact of Major Commodities on the Corporate Sector and Banking System1

A. Introduction

1. This note looks at links between Indonesia’s commodities sector and recent corporate sector and banking system performance.2 On the production side, oil and natural gas output has fallen since 2010, with existing fields in decline, while production of coal, palm oil, and rubber output has increased steadily. At the same time, prices have mostly trended down since late 2011, reflecting the current commodity down-cycle, which has led to a significant drop in revenues. Substantial swings in prices have also contributed to volatility in revenues and profits for commodity producing firms, while their leverage has been rising. While these firms have tended to rely more on internal financing, and lately on external borrowing, and less on borrowing from resident banks. Nevertheless, some banks are seeing a rise in nonperforming loans (NPLs) tied to the mining and agricultural sectors, but from a small base. Facing the near-term prospect of weak revenue generation and tighter financial conditions, commodity producers’ balance sheets could come under further pressure absent a noticeable pick up in external demand. This development could have knock-on effects to other parts of the economy, particularly in more commodity dependent rural areas.

B. Recent Trends

2. The contribution of Indonesia’s commodities sector to economic activity remains significant, but the value of production and exports has declined sharply in recent years. Total production accounted for around 9 percent of GDP in 2014, compared to 14 percent in 2011 (Figure 1). Major commodities still comprised about half of all merchandise exports in 2014. However, since their peak in 2011, the overall value of commodity exports has fallen by almost 30 percent in U.S. dollar terms. This decline has occurred across all products, but the causes have differed. For coal, palm oil, and rubber, the drop in the value of exports has been mainly driven by the recent slump in commodity prices, but for oil and gas underinvested and declining production capacity has been a key factor (Table 1).

Figure 1.Indonesia: Recent Trends in the Commodities Sector

Table 1.Indonesia: Changes in Export Receipts
Prices (US$/ton) 1/Production (tons, in thousands) 1/Exports (US$ billions)
20112014Change20112014Change20112014Change
Coal13075−42%20727734%26.920.8−23%
Oil10496−7%1914−27%19.613.3−32%
Natural gas16178%129−21%18.515.7−15%
Palm Oil1,077739−31%182326%19.416.8−13%
Rubber2.190.89−59%0.650.7922%14.17.0−51%
Metal ores 2/6.82.0−70%
Copper8,8236,863−22%5326−52%4.71.8−62%
Nickel22,90916,893−26%588−87%1.30.1−90%
Bauxite2,4011,867−22%31956−82%0.80.1−86%
Sources: Bank Indonesia; and IMF staff estimates.

Except natural gas (in cubic meters) and rubber (in pounds). Implied production volumes were computed from export receipts and world prices.

Calculations for metal ores are complicated by the government’s implementation of a ban on the export of raw mineral ores beginning in 2014. Output increased in 2013 ahead of the ban, but then declined sharply in 2014. As of mid 2014, exports of copper concentrate had resumed, but exports of nickel and bauxite remained close to zero.

Sources: Bank Indonesia; and IMF staff estimates.

Except natural gas (in cubic meters) and rubber (in pounds). Implied production volumes were computed from export receipts and world prices.

Calculations for metal ores are complicated by the government’s implementation of a ban on the export of raw mineral ores beginning in 2014. Output increased in 2013 ahead of the ban, but then declined sharply in 2014. As of mid 2014, exports of copper concentrate had resumed, but exports of nickel and bauxite remained close to zero.

3. Markets for Indonesia’s commodity exports vary by product (Figure 2). While China has been an important and fast growing trading partner (coal and metal ores), Japan is still Indonesia’s largest export market (oil and natural gas). Singapore (including re-exports), the United States (rubber products), India (coal and palm oil), and Korea (most commodities) are also important markets. As of August 2014, the agriculture sector employed around 39 million people (34 percent of the total, but mainly outside the export-oriented commodities sector), while the mining and quarrying industry provided employment to 1.4 million people (1.3 percent of the total).

Figure 2.Indonesia: Export Destinations for Major Commodities 1/

Sources: Global Trade Atlas; and IMF staff estimates.

1/ Figures are averages for 2011–13.

C. Impact on Corporate Sector

4. Recent trends in commodity exports have had a significant impact on corporate revenues and profits.3 In general, revenues and profits of commodity producers have been highly correlated with the U.S. dollar value of exports and global prices (Table 2 and Figure 3). For the oil and gas, metal ores, and palm oil and rubber sectors, profits have been highly correlated with global prices. However, in the coal sector, profits and revenues show lower correlations with prices, indicating that production also plays a role. These observations are consistent with the view that the coal sector in Indonesia has a relatively low cost of entry and is more competitive so that producers attempt to boost output to cover costs when prices fall. However, it also means that coal producers have lower profit margins.

Table 2.Indonesia: Drivers of Revenues and Profits, 2008-13(Correlation coefficients)
ExportsPricesExportsPrices
CoalOil and gas
Revenues0.9920.042Revenues0.9330.994
Profits0.3760.496Profits0.8390.976
MineralsPalm oil and rubber
Revenues0.5350.450Revenues0.8890.841
Profits0.1400.705Profits0.7500.917
Source: IMF staff estimates.
Source: IMF staff estimates.

Figure 3.Indonesia: Exports, Revenues, and Profits by Sector

5. For corporations operating in the nonrenewable commodities sector, liabilities and debt ratios have increased significantly in recent years (Figure 4). This trend may reflect lower global interest rates, which made debt financing more attractive, especially for exporters that have access to U.S. dollar revenues.

  • In the coal sector, liabilities have risen by about 30 percent per year on average since 2008, while operating revenues have grown only 10 percent and profits have declined. The increase in liabilities shows up in leverage ratios, with the debt-to-equity ratio in the coal sector around 80 percent at end 2013—doubling since 2008.4 Given a high correlation between prices and profits, further declines in prices could result in higher leverage ratios.

  • The oil and gas sector largely reflects developments at Pertamina. Debt liabilities in the sector have increased more than six-fold since 2008, and leverage ratios have also risen, with the debt-to-equity ratio at 80 percent at end 2013. Pertamina itself began to issue global bonds in 2011. The increase in funding in this sector reflects the need for substantial investment to maintain production, as existing oil and gas fields naturally decline.

  • In the metals mining sector, liabilities have also risen rapidly, with annual growth averaging 20 percent since 2008. With operating revenues and profits flat during this period, however, leverage ratios have increased. Nevertheless, the debt-to-equity ratio remains low at just over 20 percent.

  • In the palm oil and rubber sectors, liabilities have risen in U.S. dollar terms but the debt-to-equity ratio has not shown an overall trend, ranging from 40–60 percent.

Figure 4.Indonesia: Debt Indicators for the Commodities Sectors

D. Impact on Banking System

6. Direct exposure of the banking system to the agriculture and mining sectors is relatively low.5 At the same time, weak commodity sector revenues have been a factor in slower deposit growth, contributing to funding pressures in the banking system. While loans to agriculture and mining as a share of total loans outstanding are only 6 percent and 3½ percent, respectively (Figure 5), banks’ exposure could be larger via indirect effects on other related sectors, for example construction and equipment. Some lending to commodity-related activity may also be classified as lending to processing-related sectors.

Figure 5.Indonesia: The Banking System and Commodities Sector

7. Different types of banks have different exposures. For agricultural loans, state and rural banks have higher exposures, given their customer base. For mining, foreign banks have the largest exposure, likely reflecting relationships arising from heavier foreign investment in this sector. Banks’ concentration risk appears to be contained, nonetheless, since even for the banks with the largest exposures the loans to each sector constitute less than 10 percent of all loans outstanding. Still, caution is warranted, given these sectors’ common risk exposure profile to a price shock.

8. Nonperforming loans in the agriculture and mining sectors have been lower than the average, but those in mining have risen recently, drawing closer to the average for all sectors. Broadly speaking, the major lenders to agriculture (state and rural banks) and to mining (foreign and joint venture banks) have relatively low NPLs. For regional government banks, NPLs have surged in both the agriculture and mining sectors, but loans to these sectors account for only a small fraction of these banks’ loan portfolios.

E. Near- to Medium-Term Outlook for the Commodities Sector

9. Risks facing the commodities sector will likely stay elevated in the near term, given slowing growth of several major trading partners and the outlook for lower commodity prices. (Figure 6). To contain the effects of weak profitability and higher leverage of commodity producing firms on the broader economy, steps to improve monitoring of corporate sector performance, including external borrowing, should help. However, it will also require close supervision of those banks heavily exposed to commodity sectors, given the likelihood that NPLs will increase if demand conditions faced by commodity producers fail to improve. Fiscal and structural reforms aimed at improving Indonesia’s competitiveness could help commodity producers through access to better power and transport infrastructure, streamlined investment approvals, and possibly more foreign investment in the sector.

Figure 6.Indonesia: Global Outlook

Prepared by Lawrence Dwight.

The focus of this note is on the export-oriented commodities sector, which is dominated by coal, oil, natural gas, metal ores, palm oil, and rubber products in Indonesia.

Corporate financial data covers the largest companies in each industry for which data was available. Many corporations are active in both the oil and gas sectors and palm oil and rubber sectors, respectively. Thus, the corporate financial data is combined for these two pairs of sectors.

These figures exclude liabilities of PT Bumi Resources, a large thermal coal producer in Indonesia, which had its rating cut by Standard & Poor’s to default in December 2014. It holds 40 percent of the liabilities of companies in the coal sector for which data were available.

Banking data are more aggregated than corporate financial data. Bank Indonesia reports outstanding loans to and NPLs for mining and quarrying (including coal, oil, and gas) and agriculture (including palm oil and rubber) but not to individual sectors.

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