Transcript Impact of the Asian Crisis on Trade Flows: A Focus on

Impact of the Asian Crisis on Trade
Flows: A Focus on Indonesia and
Agriculture
Rick Barichello
University of British Columbia
March 4, 1999
Introduction
• Asian crisis: large exchange rate adjustments
• Indonesia: 80-85% decline in value of Rupiah
– traded goods prices rose by 3-4 times (Rp 2400-8800)
– abrupt depreciation: November 97 to February 98
– largely under conditions of prior macro balance
• Crisis involved other factors: recession in domestic
economy and abroad in region, financial sector meltdown
• Objective: determine trade flow effects of this
massive exchange rate change for Indonesian case
– effects on aggregate trade and agricultural trade
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Background Prior to Crisis across region
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Unusually high growth rates in 1980s, 1990s
high savings and investment rates
increasingly open trade and industrial policies
rapid expansion of labour-intensive manufactured
exports
• balance between subsidy and tax in Agric sector
• prudent macroeconomic policy: (non-inflationary
monetary policy, non-deficit fiscal policy, relatively
appropriate exchange rates, opening up of capital markets)
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Problem Areas
• Some privileged sectors with high protection
– import restrictions, investment licensing, sector or firmspecific tax exemptions
• banking sector growth with
– poor enforcement of prudential regulations
– weak financial supervision, capital base small
– pressures to lend to risky, dubious SOE ventures and
privileged investors
– rapid increase in foreign debt by some banks
• banks with poor balance sheets, high leverage;
vulnerable to currency depreciation, fall in growth
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1997 Situation
• Massive reversal of capital flows across 5 most
affected countries (Indonesia, Malaysia, Philippines,
South Korea, and Thailand)
– 1996: $93.8 billion
– 1997: -$6.0 billion
– Decline of $99.8 billion, of which $17.6 B in equity
investment, $82.1 B in private credit
– Partially offset by official capital flows of $33.5 billion
• Drop in incomes across all 5 countries, reducing
export demand for all, hurting other countries
throughout SE and East Asia. Cross country links!
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Indonesian Differences
• Extent of currency depreciation, loss of income
and export demand much greater
• large build-up of foreign debt in non-bank private
sector (major debt restructuring problem still here)
• rel. good prior macro policy: some overvaluation
of currency, no fiscal deficit, little inflation
• high competitiveness in many sectors…low costs
and substantial know-how and labour skills
• policy response to crisis was good, became mixed;
loss of credibility of govt commitment to reform
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Expected effects of exchange rate change
• For traded goods: output price tripled, imported
raw materials prices also up three-fold
– on domestic value-added margin, profits increased to
increase production for export or competing w/ imports
• supply response with lag, important for tree crops
with long gestation periods
• Exports: increase most where VA greatest (e.g., in
farming), but with lags, longer than data period?
• Imports: with three-fold price rise, demand falling
– quickest response on consumption side
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Other factors additional to exchange rate
• Major contraction of financial sector in 1998
– little trade finance available, any lending difficult to get
• debt restructuring for private firms with large
foreign debt inhibiting production, export response
• Export demand down in region, particularly Japan
• Reduced domestic demand due to -15% recession
• Political and social unrest, raising direct costs and
reducing investor confidence, raising cost of
capital to Indonesia (increased country risk)
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Potential agricultural exports
• Series of partial budgets done w/ Policy Analysis
Matrix approach on basis of 1994-98 field work
• traded goods prices adjusted for currency
depreciation, other prices adjusted for inflation
• commodities included: rice, corn, soybeans, sugar,
dairy, crude palm oil, cashew nuts
• ALL commodities became export competitive
• no adjustment in land prices to reflect increased
competition for land from output expansion
• no allowance for time lags to determine logistics,
introduction of new grading and quality standards
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Aggregate Non-oil/gas Export Data
• Oil/gas removed to get clearer picture because
they are largest single category and determined by
long term contracts, OPEC constraints, etc.
• export pattern is erratic: since depreciation began,
exports fell in Dec 97 to Feb 98 period, bounced
up and down by ~20 percent to end of period
• no statistically significant upward trend
• decline in each of last three month
• no evidence of export boom after almost a year
• some case studies of sectors with export booms
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Aggregate Non-oil/gas Import Data
• Expectation that imports would decline more
quickly than exports would rise
• evidence gives strong support to this expectation
• Imports fell 40% from October 97 to February 98
– statistically significant trend, robust to time period
• data supports exchange rate sensitivity for imports
– also would be predicted by domestic income decline
– also predicted by from banking sector collapse and
from fall in investor confidence in export sector,
reducing demand for imports
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Agricultural Export Data
• Not easy to detect effect of currency depreciation
on total agricultural exports, like aggregate exports
• surprising; expectation that agriculture would show export
response due to few imported raw materials
• sharp drop in ag exports in November 97 to January 98
period, similar to aggregate export data
• gradual increase Jan/Feb 98 to Jul/Oct98 of 50%
• given chaos in exchange rate movements and
financial markets in Dec97-Feb98 period, lagged
response to expanding exports, 98 data consistent
w/ export growth in response to depreciation
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Agricultural Import Data
• Rice imports excluded to get clearer picture of
imports; rice very large category that responds erratically
to political circumstances more than economic situation
• from Aug 97 onward, agricultural imports clearly
declining; statistically significant time trend
explains 2/3 of variation in imports
• similar to aggregate import data: in both cases,
imports appear to respond significantly and quite
rapidly to exchange rate changes
• decline in ag imports more gradual and extended
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Disaggregated Exports: Rubber, Palm Oil
• Rubber:
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very large sub-component of agricultural exports
steady export value decline, probably due to prices
odd one-month doubling of exports
pattern may not yet show supply response due to
planting lags
• Palm Oil
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also very large sub-component of ag exports
strong pre-depreciation growth in exports
major export decline in November 97-January 98
erratic and moderate growth from January 98 to Oct 98
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Fruit/Vegetable, “Other Ag Exports”
• Fruit/Vegetables
– small category but large potential
– erratic export pattern; difficult to see trends
– increasing exports since July 98 but little basis for
saying this is exchange rate-related
• Other Agricultural Products
– large sub-category, like rubber in size
– does show exchange rate related pattern
• exports rose in first half of 97, remained flat for next year, then
doubled from August to October 98
• delayed output expansion consistent with that of many farm
products
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Wheat Imports
• By far Canada’s largest export commodity to Indonesia
• wheat imports to Indonesia quite erratic (irregular
shipments?)
• statistically significant time trend, at 5% per
month, explains 1/4 of variation in wheat imports
• more gradual and extended decline following
depreciation, just like total agricultural imports
and unlike more immediate and dramatic crash in
imports in non-ag import data. Due to government
loan guarantees instead of private financing?
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Conclusions
• Massive currency depreciation in Indonesia in
97/98, led to negative growth and financial sector
collapse; so difficult to associate all trade data
solely with depreciation
• Negative effect of depreciation on imports clear
and dramatic, for aggregate and agricultural
imports; more gradual decline for ag imports
• Currency depreciation effect on exports delayed,
erratic and difficult to detect, particularly lagged
– may be due to difficulties in getting inputs, economic
uncertainty, and supply response lags
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