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Business in the new Indonesia

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This year has proved tumultuous for Indonesia, with the presidential election and Jakarta hotel bombings taking centre stage. In the aftermath, how is the Indonesian market positioned for Australian exporters? Find out some of  the trade opportunitiesavailable with our northern neighbour. Indonesia is the world’s fourth most populous country and, perched on Australia’s doorstep, one with which we have a unique and important relationship. The Department of Foreign Affairs and Trade (DFAT) reports that there are more than 400 Australian companies currently operating in Indonesia in such sectors as mining, construction, finance, food and beverage, and transport, including some of Australia’s most trusted names: BHP Billiton, the Commonwealth Bank and Goodman Fielder. The Australian Bureau of Statistics valued investment in Indonesia at $3.4 billion in 2008. Two-way trade in goods and services reached $10.3 billion in 2007/08, making Indonesia our 13th largest trading partner, and our 11th ranked export market. Australia primarily exports live animals, aluminium, wheat, crude petroleum and sugars to Indonesia, with our major service exports being education-related travel and personal travel. In 2009/10, Australian aid to Indonesia will be worth an estimated $452.5 million, making Indonesia the largest recipient of Australian aid, and demonstrating our commitment to neighbourly relations.

Risky Business

Recent high-profile court cases on drugs, perceived complexities in doing business in Indonesia, previous terrorist attacks such as the Bali bombings, political upheaval and natural disasters such as tsunamis and earthquakes are all existing sources of negative investor sentiment for Indonesia. Cautious investor confidence has, however, returned since the Bali bombings, and was greatly enhanced by the re-election this year of President Susilo Bambang Yudhoyono for another five-year term. The 2009 terrorist attacks on the Marriott and Ritz-Carlton Hotels in Jakarta challenged this growing confidence. Although the attacks appeared to target foreign businesspeople, a DFAT spokesperson says early indications are that the bombings "are not significantly adversely affecting business and investor sentiment. Anecdotal evidence suggests that if they are isolated events these attacks will have little lasting impact on investment planning by Australian investors". Roger Donnelly, chief economist of the Export Finance and Insurance Corporation (EFIC), reports in the agency’s World Risk Developments paper that prior to the bombings, the currency, share and bond markets had all been rallying and that interestingly, "the blasts completely failed to shake this optimism". Indonesia still faces many challenges moving forward, however. In the World Bank’s Doing Business 2010 report, Indonesia ranked 142 on contract enforcement, with investment risks largest in the mining and energy sectors, where not coincidentally foreign investment has stagnated over the past decade, according to Donnelly. "High tax and royalty payments, an uncertain regulatory environment and concerns over the sanctity of contracts, all accentuated by the devolution of power to regional bodies, are the chief headaches," he says. Australia Indonesia Business Council (AIBC) national vice-president Ross Taylor agrees, noting that addressing ‘KKN’ (corruption) is a major problem for the Yudhoyono government, and that "dealing with a number of recalcitrant regencies as a result of the introduction of regional autonomy legislation presents some enormous challenges." Other challenges are business systems and governance Taylor adds: "Many major companies involved in telecommunications and in the resources sector still want more transparent and simplified systems for establishing and operating large scale businesses in Indonesia." EFIC identified that "budgetary constraints mean the government has limited capacity to invest. Roads have seen little investment over the past decade, while ports cannot accommodate the larger cargo ships. Electricity generation is struggling to keep up with annual demand growth of 8 percent." Donnelly also found that direct investors were holding tight and that a bigger setback for the economy than the bombings was on the horizon-oil price rises. "The fall in world commodity prices in general, and oil prices in particular, from vertiginous peaks last year has conferred several benefits: cutting Indonesia's import bill, lowering rupiah prices of fuel and rice, damping inflation, and enabling the central bank to cut interest rates. But now that the oil price is climbing again these effects are unwinding. The budget is particularly vulnerable because it subsidises fuel and electricity prices."

On a positive note

The combination of Vice-President Boediono and President Yudhoyono is considered a positive step for Indonesia. Hal Hill of the East Asia Forum, said: "International reporting on Indonesia, including that from Australia, has tended to oscillate excessively, from the euphoric to the gloomy. Let there be no mistake. The recent Jakarta bombings, the first in almost four years, is a terrible tragedy. But the country is in good hands, and its economy is doing better than most at the moment." Taylor shares this view, commenting on signs that Indonesia is rebuilding: "Already our major banks have expanded their activities in Indonesia. CBA [Commonwealth Bank] and ANZ are leading the race to meet the needs of this fast-emerging democracy. Foreign SME activity has also increased in recent times." The Indonesian economy is reasonably open to foreign trade. EFIC states: "Trade (exports plus imports) were 60 percent of GDP in 2008." Donnelly also notes that the International Monetary Fund expects the economy to grow by 3.5 percent in 2009, outperforming all other major Asian economies except China and India. With this in mind, a step in the right direction this year for Indonesia and Australia’s economic relationship is the landmark ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA), expected to come into effect in early 2010. It is the largest free trade agreement to which Australia is signatory: ASEAN and New Zealand together account for 21 percent of Australia’s total trade in goods and services. As a result of this agreement, Australia will eliminate tariffs for ASEAN countries that do not already benefit from duty-free treatment-Vietnam, Indonesia, Malaysia and the Philippines. Early legal analysis of the agreement by Minter Ellison suggests that it will promote greater certainty and provide a framework for ongoing services negotiations with ASEAN countries. If Australians can retain confidence in the country’s security and political stability, there are many sectors of opportunity. DFAT reports export potential exists for a range of Australian companies with strong demand for agribusiness services, food and beverages, consumer products including fashion items and cosmetics, ICT including mobile telephony, and mining supplies. There is also good scope to expand services exports in construction and infrastructure development, finance, education and franchising sectors. The investment climate is improving, says Donnelly: "In 2007, a new investment law was passed which mandates national treatment for foreign investors and cuts red tape. A powerful anti-corruption commission has been established which has been pursuing high-profile individuals. SBY [Yudhoyono] has also put in place a reform-minded economics team, headed by Boediono and Finance Minister Sri Mulyani Indrawati." With personal travel high on list of Australia’s trade with Indonesia, it is interesting to also note that there is a lot more development that could take place in this area, potentially signalling prime opportunities for infrastructure specialists. The need to open up other areas of Indonesia apart from Bali for tourism is important too, says Taylor: "This is largely dependent upon addressing the poor state of infrastructure throughout the archipelago. It’s simply not much good having some of the most beautiful places to visit on earth when tourists cannot reach them without a horrendous road journey and poor quality hotels." When paradise has been lost, the upshot is the opportunity to find it again.

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