Is Indonesia's Trade Surplus Growth Sustainable in a Slowing Global Economy?

Indonesia's trade surplus has surged to record levels in early 2025, driven by robust export growth in key commodities like palm oil, iron/steel, and nickel. However, global demand headwinds, import volatility, and reliance on commodity cycles raise questions about the sustainability of this momentum. For investors, understanding Indonesia's export-driven growth model—and its vulnerabilities—is critical to navigating opportunities in natural resources and manufacturing.

Key Export Commodities: Drivers of the Surplus

Indonesia's export mix is dominated by natural resources and manufactured goods, with notable trends in Q2 2025:

1. Palm Oil & Derivatives:
   Exports rose by 20% year-on-year in early 2025, contributing $7.05 billion to the trade surplus. As the world's top palm oil exporter, Indonesia benefits from global demand for biofuels and food oils. However, prices remain volatile due to competition from soybean oil and sustainability concerns.

2. Iron, Steel, and Manufacturing:
   The manufacturing sector grew by 16.08% in January–April 2025, fueled by strong exports of iron/steel ($8.81B, +6.62%) and footwear ($2.05B). This reflects Indonesia's push to diversify beyond raw commodities into processed goods.

3. Nickel:
   A star performer in the EV era, nickel exports hit $2.59 billion, driven by soaring global battery demand. Indonesia's policy to ban raw nickel exports by 2024—forcing foreign investors to build processing facilities domestically—has boosted value-added production.

4. Coal:
   A notable laggard, coal exports fell by 19.74% to $8.17 billion, as global energy shifts and oversupply pressure prices. This highlights the risks of overreliance on fossil fuels.

Policy Measures: Shoring Up Competitiveness

Indonesia's government has implemented strategies to sustain export momentum:
- Rupiah Depreciation: The weaker currency (down 3% vs. USD in early 2025) makes exports cheaper, aiding competitiveness.
- Trade Diversification: While China remains the top export destination ($18.87B), Indonesia is targeting the U.S. and EU. U.S. footwear exports rose 11%, and EU shrimp exports surged 72%.
- Infrastructure Investment: A $700B infrastructure plan aims to boost manufacturing capacity and reduce logistics costs.

Challenges Ahead

Despite strong Q2 results, risks loom large:
1. Global Demand Slowdown: China's economic moderation and U.S. fiscal tightening could dampen demand for Indonesian goods.
2. Commodity Cycles: Palm oil and nickel prices are tied to volatile markets—sustainability regulations and EV adoption could swing both ways.
3. Trade Imbalances: A $6.9B deficit with China (driven by machinery imports) underscores vulnerability to supply chain dependencies.

Investment Implications

Investors should focus on sectors with structural tailwinds while hedging against commodity risks:

1. Natural Resources:
2. Nickel: Companies like Antam (ANTM.JK) and foreign partners in Indonesian processing facilities are beneficiaries of EV demand.
3. Palm Oil: Wilmar International (SGX: W61) and local mills remain stable, but ESG scrutiny requires careful selection.

4. Avoid Coal: Declining exports and regulatory pressure make thermal coal plays risky.

5. Manufacturing & Exports:

6. Footwear & Textiles: Brands like Sampoerna Group (SMRA.JK) capitalizing on ASEAN's labor cost advantages.

7. Infrastructure Plays: Firms involved in port upgrades or logistics (e.g., PT Adhi Karya) could benefit from government spending.

8. Currency Exposure:

9. Investors in Indonesian equities should consider hedging against rupiah volatility, given its sensitivity to capital flows.

Conclusion

Indonesia's trade surplus expansion in Q2 2025 is impressive but not immune to global headwinds. While policy support and diversification efforts are positives, overexposure to commodity cycles and trade deficits with China pose risks. Investors should prioritize sectors with long-term demand (nickel, EV supply chains) and avoid fossil fuels. For now, Indonesia's export machine remains a growth story—but one that requires careful navigation of its uneven terrain.