Parrying the Double Blow in the Manufacturing Industry

The weakening of the rupiah exchange rate clearly puts pressure on the manufacturing industry. This is because the majority of raw materials for the manufacturing industry still have to be imported. This is reflected in the latest data from the Central Statistics Agency (BPS), where in January-February 2024, the total import of raw materials or auxiliaries reached 72.47 percent of the total imports worth 36.93 billion US dollars.

Raw materials and auxiliary materials are imported and then processed into finished products by domestic manufacturing industries. The high import of raw materials by manufacturing industries is still prevalent as upstream and inter-industry sectors in the country are not yet fully self-sufficient. There are still many types of raw materials which cannot be produced domestically.

Also read: Manufacturing Industry Does Not Expect Escalation of the Iran-Israel Conflict to Increase

When the exchange rate of the rupiah weakens, the cost of raw materials also increases. The cost of raw materials accounts for 5-15% of production costs. The amount varies depending on the industry type. The more dependent they are on imported raw material supply, the more the rupiah's depreciation will drive up production costs.

As for the industrial sector that relies on imported raw materials, they are industries whose upstream sector is still weak and unable to produce the necessary raw materials for downstream industries. These include upstream chemical industries, upstream pharmaceuticals, upstream textiles, electronics, and some food and beverage industries.

This condition is exacerbated by the escalating geopolitical tension between Israel and Iran. The tension between the countries in the Middle East has immediately sparked a series of issues. It is estimated that the tension directly drives up the world oil price. The West Texas Intermediate (WTI) crude oil futures price rose 0.5 percent to 83.14 US dollars per barrel. Meanwhile, Brent futures rose 0.3 percent to 87.33 US dollars per barrel. Even the oil price briefly surpassed 90 US dollars per barrel.

The tension is expected by the market to disrupt the world's oil supply. When supply decreases while demand remains the same, prices will rise. If the conflict intensifies, according to economists' estimates, it is not impossible for oil prices to reach a new equilibrium point, in excess of 100 US dollars per barrel.

The increase in oil prices also affects the increase in energy costs. Energy costs on average contribute 5-15 percent of the total production costs.

Also read: Industry is starting to worry about the weakening of the Rupiah against the US Dollar

Geopolitical tensions in the Middle East will also disrupt the distribution of goods and services to and from the surrounding region. The industry most affected by supply chain disruptions in that area is the upstream chemical or petrochemical industry. This is because the fulfillment of nafta, a type of oil used as a raw material in this industry, must be imported from countries in the Middle East.

Conflict in the region will disrupt the supply. Even if the delivery of raw materials continues, the delivery time will take an additional 2-4 weeks. Distribution costs will also be raised. The scheduled production chain will also be disrupted.

In fact, the upstream chemical or petrochemical industry is one of the two mother industries along with the steel industry. Downstreaming the petrochemical industry produces various types of products ranging from plastics, packaging, medicines, cosmetics, children's toys, automotive components, building construction components, and others.

All of the above are descriptions of the impacts from the business or supply side. Yet, geopolitical tensions in the Middle East also have an impact on the demand side. When world oil prices rise, global inflation will be pushed up. Increased inflation can erode people's purchasing power, meaning consumption will weaken. The result is a slowdown in the world economy. A slowdown in the world economy, including Indonesia's trading partner countries, means a decline in export demand.

Relying on the domestic market can be a solution. However, the predicted rise in world oil prices is also expected to result in domestic inflation. This rising inflation will erode purchasing power, ultimately impacting the decreasing turnover or performance of domestic manufacturing industry products.

However, the manufacturing industry is the biggest contributor to Indonesia's economy. Citing data from BPS, the manufacturing industry contributes 18.67 percent to Indonesia's gross domestic product (GDP).

Also read: Government Prepares Incentives for Importing Industrial Raw Materials from the Middle East

Various pressures can loosen the performance of the manufacturing industry. Meanwhile, Indonesia aims to become a high-income country by 2045, or 100 years after Indonesia's independence. One way to achieve this is by increasing the contribution of the manufacturing industry to the GDP to 28 percent.

The long series of pressure from the depreciation of the rupiah and geopolitical tensions in the Middle East must be anticipated by the government immediately. It is time for the government to refocus on the economy after the end of the democratic party.

The Ministry of Industry is currently discussing various policies to respond to the current conditions. One of them is discussing incentives for easing imported raw materials from the Middle East.

The State Revenue and Expenditure Budget must carry out its function as a shock absorber for the current global uncertainty. It takes various forms, including providing subsidies or strengthening funding. The government must also work closely with Bank Indonesia to maintain the stability of the rupiah exchange rate. Apart from that, the Financial Services Authority is also able to create stability in the domestic financial system.

Also read: Investors Asked to Remain Optimistic in Facing World Geopolitics