Wednesday, January 20, 2016

Emerging challenges in Indonesia and their impact on business with Australia

By Bill Farmer

AT THE END OF DECEMBER - a month which saw much-heralded visits to Indonesia by Prime Minister Malcolm Turnbull, Trade Minister Andrew Robb, other ministers and the biggest-ever Australian trade mission to that country - it was a welcome change to acknowledge some bright spots in the prospects for future economic dealings.

Bill Farmer AO, former Australian Ambassador to Indonesia. Photo: Dragoman

These include encouraging atmospherics between the Prime Minister and President Joko Widodo (Jokowi), as well as a decision to restart negotiations on the Australia Indonesia Closer Economic Partnership Agreement, which has been stalled during the political cool periods of the past year or so. Importantly too, preparations for the business delegation went well beyond the by now familiar exhortations that Australian business should be doing more trade and investment with Indonesia.

Impressive preparatory work identified some specific comparative and joint competitive advantages, including in particular sectors like food processing, textiles and fashion, logistics and animal products. Against that background, as well as other recent developments, there may be grounds for optimism that the Indonesian commercial environment is picking up, including from the viewpoint of Australian business.

It certainly needs to. President Jokowi’s first year in office was, on the whole, a serious disappointment on a number of fronts. Faced with serious issues flowing in part from low commodity prices, including growth stagnating at under 5%, substantial weakening of the Rupiah [in a country historically highly vulnerable to capital flight], export figures down 20% on the past year and inflationary concerns, the administration’s reflexes seemed, in general, wrong.

The President, early in his term, talked up the need for reform of the economy, foreshadowing a range of initiatives to enhance the commercial environment. However, apart from a welcome decision to end or phase out a range of fuel subsidies, very little of the first year’s actions could be said to have resulted in effective reform. Instead, there was frequent resort to nationalistic rhetoric and grandstanding, some of it reflexive with politicians and much of it popular with voters.

Many ministerial decisions seemed to reflect a view that a response to difficult times should be to erect barriers around the economy, make things harder for foreign investors and importers, and favour domestic rent-seekers and inefficient state enterprises.

Hence a forbidding, and worrying, range of announcements which, among other things, foreshadowed a much tougher regimen for the employment of expatriates in businesses in Indonesia, expanded the negative investment list, sent mixed messages on resources issues and subjected some imports to new restrictions.

Trade Minister Andrew Robb addressing Indonesia Australia Business Week
in Jakarta in December 2015. Photo: Geoffrey Gold

Much of this decision-making was uncoordinated, some of it clearly wrongheaded. A notorious example of the latter was the decision to restrict imports of live cattle, ostensibly in pursuit of the pipe dream of self-sufficiency, but in reality driven by baser motives.

Side by side with these newly-minted problems were persistent issues like corruption, lack of certainty before the courts, predatory local partners and problems in securing foreign investment approvals [which, tellingly, prevented a large proportion of much-vaunted Chinese investment from getting off the ground].

As a result of such actions, Indonesia was facing by mid-2015 declining business confidence in the government’s management of the economy; serious shortfalls in government spending on infrastructure projects; and slowing investment flows [partly attributable to lower investment in resources projects, but reflecting also mixed or downright discouraging messages from government]. And, politically, President Jokowi was having a far from honeymoon ride, encountering obstruction from both inside and outside his party, and tarnishing his reputation through misjudged approaches to corruption issues and religious intolerance.

Faced with chatter of his becoming a one-term president, with continuing deterioration in the value of the Rupiah and foreign-exchange reserves, with unpromising wider economic prospects, and with particular public discontent over issues like the dramatic beef price rise caused by the cattle import restriction, the President acted in the period leading up to his first anniversary.

IN AUGUST, following near-panic in the currency and equities markets, he sacked several ministers, including major players in the economic sphere; appointed a well-respected technocrat to head the ministerial economic team; and foreshadowed a range of reforms, setting performance indicators for trade and investment. In the months since then, several packages of reforms have been announced, with the overall emphasis being on reducing inflation, halting the slide in the Rupiah, deregulation and a determination to improve competitiveness and the overall business and investment climate.

"The particular dynamics of the economic and broader relationship with Australia are more positive than for some time past"

Announcements were made in areas as diverse as energy policy, wages policy, and licensing regimes for trade and investment. Some commentators also read significance into President Jokowi’s subsequent indication to USA President Barack Obama of Indonesian interest in participating in the Trans-Pacific Partnership, which seemed to represent a welcome outward-looking approach. And new Trade Minister Thomas Lembong has spoken a number of times about removing trade barriers and repealing regulations which his predecessor had introduced and which he said did not work. These recent developments are welcome as far as they go.

Nonetheless, they do not seem to amount to a profound shift towards market-oriented reforms and much of the instinct remains to increase public sector support. Moreover, a range of trade-restricting barriers, market-distorting incentives and other practices favoured by many rent-seekers continue. It also has to be said that business is cautious about taking the government’s pronouncements at face value, given a long history of under-delivery on promises of reform.

Overall, the signals now being sent by the administration contain many positive elements, and the particular dynamics of the economic and broader relationship with Australia are more positive than for some time past. The real tests are still to come, and with them judgements about future directions for the Indonesian economy.

The Australian government is right in urging a new look at potential opportunities in Indonesia, but this should continue to be informed by in-depth analysis and understanding of all of the nuances of the emerging facts of life in that country.


Bill Farmer AO is a Counsellor at Dragoman Pty Ltd and former Australian Ambassador to Indonesia. Dragoman is a specialist advisory firm that works with its clients to win competitive advantage through understanding and managing risk. Republished with permission.

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