Indonesia-Australia Relationship: An economical analysis

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As Indonesia’s economy continues to grow and its population swells, the relationship with Australia is becoming more and more asymmetric. From the Australian perspective, it presents some opportunities but, as a counterbalance, Indonesia may be seeking to engage more closely with other, larger, powers in the region. This paper will look at the current economic and security ties in that context and explore some of the possible future prospects for the bilateral relationship

Key Points

  • Over the next decade, Australia may become increasingly less relevant to Indonesian economic interests.
  • The current trade relationship is skewed in Australia’s favour and Indonesia is likely to look towards other, larger, markets to counter that deficit.
  • Australia has gradually reduced the amount of foreign aid to Indonesia while, at the same time, Australian investors are deterred by the generally poor Indonesian business environment.
  • There may be an opportunity for Australia to adapt its defence exports to Indonesia’s minimum essential force needs.
  • The strongest ties lie in police-to-police links, aimed at combatting terrorism. That relationship could be used as a model for other bilateral linkages.

Indonesia-Australia Relationship: Economic Relations

Australia as an Export Market

As noted in a previous FDI Strategic Analysis Paper, Australia’s economic relationship with Indonesia has begun to falter. Looking at 2017 trade figures from Bank Indonesia, Australia makes up 5.1% of Indonesia’s goods market. In comparison, Indonesia’s largest trading partners in 2016 included China (which imported 13 per cent of Indonesia’s exported goods), Japan (13%) and Singapore (11%). While Australia’s position in the Indonesian market is sizeable, increasing deficits have marred trade relations from Indonesia’s perspective. As seen in Figure 1, between 2000 and 2011 the value of imports closely matched the value of exports; bilateral trade never resulted in a deficit of much more than $500 million for either country. Since then, Indonesian exports to Australia have fallen in value, resulting in a trade deficit for Indonesia of $2.6 billion in 2016, the largest shortfall in the trading relationship to date.

he saving grace of Jakarta’s economic relationship with Canberra lies in Australia’s contribution to the Indonesian tourism industry. Defined as “travel exports” in services trade statistics, tourism is a vital part of the Australian-Indonesian economic relationship and is the single largest source of income for Indonesia in that relationship. When services exports are taken into account, the $2.6 billion trade deficit that Indonesia experienced in 2016 is reduced to $593 million.

Looking to the longer-term, however, Australia does not appear to be the primary market for Indonesian plans to expand its tourism industry. As a previous FDI Strategic Analysis Paper has discussed, Indonesia is expected to focus on increasing the inflow of Chinese and Muslim tourists. Arrivals from China have rapidly overtaken those from Australia and now make up the bulk of international tourists visiting Indonesia. At the same time, the Indonesian Government is working to promote Halal tourism, an approach that holds promising potential, given that Indonesia is the largest Muslim country in the world.

From Indonesia’s perspective, the declining level of its goods exports to Australia is a weak point in the bilateral economic relationship. That may not improve for some time. With Australia’s relatively small population of 24 million, Indonesia is potentially better off seeking to expand trade in other, larger, markets. Historically, China, India and the United States have been the largest and fastest-growing export markets for Indonesia. In the past five years, however, growth in the Chinese and Indian markets has begun to stagnate and, at times, fall. Based on the last five years of Indonesian exports, the Philippines and Vietnam have replaced China and India as the fastest growing markets for Indonesia. Compared to Australia, the Philippine and Vietnamese markets for Indonesian exports are larger, faster-growing and also in close proximity to Indonesia.

It is unlikely that the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) will lead to Australia becoming a primary market for Jakarta. Negotiations surrounding the agreement have been difficult and failed to conclude by the revised December 2017 deadline. That said, when implemented, the IA-CEPA will play an important role in boosting bilateral trade and investment, just not at a level comparable to Indonesia’s larger economic relationships. According to the Australian Department of Foreign Affairs and Trade, the IA-CEPA aims to address impediments to bilateral trade, including both tariff and non-tariff barriers, to improve access to each other’s services markets and to cut the red tape preventing Australian investment in Indonesia.

Investment

Canberra’s investment relationship with Jakarta has room for improvement from Indonesia’s perspective. According to statistics from Indonesia’s Investment Coordinating Board (BKPM), Australia ranked as the tenth-largest investor in Indonesia during first quarter of 2018, investing $172.52 million through 176 different projects. That has seen Australia move up in the ranks of the top investors in Indonesia compared to the first quarter of 2017, even though total investment slightly decreased from 2017. In the first quarter of 2017, Australian investment realisation reached $185.65 million through 158 projects, ranking twelfth.

While Australia is placed among the top ten overall investors in Indonesia, that position is more due to the fact that comparatively few countries invest significant sums in Indonesia. Additionally, as seen in Figure 2, investment realisation from Australia sits at almost half that of Malaysia and approximately twenty times less than that of Singapore.

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