Indonesia’s recovery has meant stronger links with Australia

18 December, 2006

1997 was the year of living dangerously – economically speaking – in Indonesia. Indonesia was one of the major skittles to fall during the Asian financial crisis, with institutional collapse and the eventual downfall of the long serving regime of President Suharto. Tim Harcourt, from Austrade, reports.

The International Monetary Fund (IMF) was called in to deal with the financial rescue operation and many international economic observers – including Australia’s then Reserve Bank Deputy Governor Stephen Grenville, who was a diplomat in Jakarta before joining the central bank – were instrumental in helping Indonesia put together a policy package of reform and recovery.

However, almost a decade has past since those fateful days of 1997 and three things have happened. Firstly, Indonesia’s economic performance has drastically improved. Secondly, many home-grown Indonesian policy makers have come to the fore of economic reconstruction and recovery. And thirdly, Indonesia is now a fully-fledged democracy under the current president Susilo Bambang Yudhoyono (known as ‘Bambang’ or ‘SBY’), who is two years into his five year term.

Indonesia is developing stronger capacity in economic policy advice. In fact, Dr Sri Mulyani Indrawati, the Indonesian Minister of Finance was recently awarded Euromoney’s world finance minister of the year (an award won by former Australian Treasurer Paul Keating in 1984). When Dr Sri Mulyani visited Australia for the G20 she also made a keynote speech to the Australian Indonesia Business Council in Adelaide on Indonesian financial reform and the outlook for the archipelago’s economy.

At the Adelaide event, she referred to her ‘two brains’ who were actually her two key young Indonesian economic advisers who were in the audience. It was refreshing to see a Minister acknowledge her staff in such a public way.

When in Jakarta recently I actually had the opportunity to meet one of the ‘brains’ - Dr Chatib Basri. The Australian National University (ANU) educated Basri, who holds a fellowship at the University of Indonesia as well as his Government advisory role, pointed out that: “Indonesia’s investment to GDP ratio is actually higher than many other ASEAN economies such as Malaysia.

This suggests that a benign Indonesian investment climate is ‘necessary but not sufficient’ for further development.” Basri believes that there are supply side ‘capacity constraints’ that are hindering development and that the Government will be working on investment in infrastructure and tax reform as a way of advancing economic reform. 

Umar Juoro, an economist with the Habibie Centre (named after Suharto’s immediate successor B.J. Habibie) agrees that there are opportunities for investment in Indonesia – particularly in the banking and telecommunications sectors. 

“Banking and telecommunications are, in many ways the jewels in the crown of Indonesia’s economy. There has been a widespread rationalisation of banks in Indonesia, and fewer problems with non-performing loans. Telecommunications is going from strength to strength with the growth of Indonesia’s young population However, there is still some microeconomic reform needed in traditional extractive sectors such as mining and forestry,” he explained.

Australian banks are taking advantage of Indonesian reforms in the financial sector. According to Owen Young, Financial Services Principal at consulting firm, at Booz Allen Hamilton, Australian banks that entered the market pre-1997 have been consolidating their position since.  

“Both the ANZ, with its investment in Panin Bank and the Commonwealth with its wholly owned subsidiary, PT Bank Commonwealth, entered into joint venture arrangements prior to the financial crisis in 1997.  They are now benefiting from taking a longer term perspective and have profitable businesses in Indonesia.

They are not only doing business with Australian companies in Indonesia but have also managed to develop attractive positions with local Indonesia customers - largely based on successfully transferring Australian financial expertise to Indonesia,” he explained.

Stephen Schwartz, the IMF’s Country Director for Indonesia, believes that the country has achieved significant macroeconomic stability. “Economic growth is now in the 5-6 per cent range, public debt to GDP is below 40 per cent and reserves have been built up to US$30 billion (A$37billion).

The Indonesian Government handled the abolition of the fuel subsidy very well in terms of containing inflationary pressures, and has shown sound judgment in respect of monetary policy as well. In fact, Indonesia has done so well in terms of macroeconomic and fiscal performance, that it paid back its IMF loan four years ahead of schedule,” he says.

Schwartz explained that it is a great source of pride that Indonesia met its IMF commitments early as the IMF played a very public role during the 1997 crisis and was not at all popular with the Indonesian people. “It’s very different nowadays, I can openly tell people where I work, except perhaps, for taxi drivers,” he said.

American businessman Jim Castle has spent 30 years in the archipelago. He has met every Indonesian President from Sukarno to SBY. Whilst he is concerned about social and business infrastructure and decentralisation in Indonesia, he thinks there are plenty of promising signs. “Beneath all the data, few people realise that Indonesia has plenty of dynamic, robust and unpretentious SMEs in the private sector right across the country.

They are not big names but they are important sources of employment and wealth for many of the regional economies,” he explained.  Castle explained that investors should not misunderstand Indonesia’s role in the region particularly in light of the rise of China and India. “Multinational Companies don’t come to Indonesia for low cost labour. They come to tap into the vast domestic market. They set up to get a foot-hold here and then they have a young, growing consumer population right on their doorstep,” he said.

Rod Morehouse, Australia’s Senior Trade Commissioner in Jakarta agrees.  “Like the USA, Indonesia has a large domestic market, though it is naturally a developing country version. However there is a burgeoning middle class here. Around 22 million Indonesian consumers are capable of spending A$1,900 a month and over half the population is under 25,” he said. 

So ten years after the events of 1997, Indonesia is back on its feet with an open democracy and a commitment to economic reform. Let’s hope that Indonesia’s economic recovery continues and that future IMF officials in Indonesia are able to tell taxi drivers what they do for a living.  

Key Facts:

Australian goods exports to Indonesia: A$3,983 million (key sectors: crude petroleum, aluminium, cotton), 2005-06.

Australian services exports to Indonesia: $693 million (key sectors: education, tourism)

Australian-Indonesia two-way trade: A$8,537 million, 2005-06

Key growth sectors: agribusiness, education, resources, professional services, consumer/lifestyle products

Number of Australian businesses exporting goods to Indonesia: 2511 exporters (behind Singapore on 5612 and Malaysia on 3285 but ahead of Thailand on 2219).

Source: DFAT, ABS, Austrade.