Why the new Indonesia free trade agreement is so important

Indonesia has come a long way since the dark days of the Asian Financial Crisis. The world’s fourth-most populous country is now also its seventh-largest economy in purchasing power parity terms, and Southeast Asia’s largest by far. 

Growth has come in at 5 per cent or more per year for most of the past decade, and HSBC forecasts the same for 2019. 

An ethnically-diverse and sprawling archipelago that shares maritime borders with countries as far apart as India and Australia, Indonesia is a particularly difficult country to navigate, both physically and economically.

This is why the newly-struck Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) is so important. It will allow Australian companies to better capitalise on our close neighbour’s continued development and the expected rise of its middle class alongside other increasingly affluent consumers within South East Asia.

Indonesia’s trading relationship with Australia has always been limited compared to the country’s size and potential: it accounted for just 2.1 per cent of our total two-way trade in 2017/18, ranking it as our 13^th largest trading partner behind other Asian markets such as Hong Kong, Malaysia, Thailand, Singapore and South Korea.

By giving preferential market access or duty-free trade status to over 99 per cent of Australian goods exports to Indonesia by value, and facilitating greater exports of key services such as education and aged care, the IA-CEPA will help unlock the potential purchasing power of an Indonesian “consuming class” that McKinsey forecasts will reach 135 million people by 2030.

Indonesia is already rising up the rankings of the World Economic Forum’s Global Competitiveness Report, where it is now in 45th position out of 140 countries.

It still runs a current account deficit, but policymakers are working hard to ensure it remains sustainable. Meanwhile, foreign exchange reserves have risen and external debt has fallen.

For certain, policy-makers and regulators will need to remain focused on continuing to increase Indonesia’s attractiveness and openness to investments, including plans to move legal and capital-markets frameworks to international standards.

Efforts are also underway to address the country’s known infrastructure gap. A five-year plan launched in 2015 aims to build more roads across the country and also includes proposals for airports, water and sanitation projects.

Further, plans to expand access to education and healthcare aim to increase the soft infrastructure required to help the country’s young population – more than a third of whom are under 20 – to thrive and contribute more effectively to economic development.

All these initiatives will fuel Indonesia’s efforts to reach its potential at precisely the time that both bi-lateral and multi-lateral trade pacts are unlocking barriers to engagement within the Asia-Pacific region at-large, facilitating greater intra-regional trade and connectivity.

The IA-CEPA and the recently-ratified Comprehensive and Progressive Agreement for Trans-Pacific Partnership are direct evidence of this trade liberalisation, as is the Australia-Hong Kong Free Trade Agreement that was finalised in November 2018. The conclusion of currently ongoing negotiations for the Regional Comprehensive Economic Partnership would further accelerate this important trend and boost Australian exporters’ already buoyant sentiment: a recent HSBC survey found that 89 per cent are positive about the current trade environment, compared to a global average of 78 per cent.

Indeed, ever-increasing linkages with the dynamic Asian economy mean the outlook for Australian exports of both goods and services is bright – both are set to benefit from increases in productive capacity and rising demand.

Like many other developing economies, Indonesia is susceptible to trade tensions and swings in commodity prices and global investor sentiment, while election cycles have a habit of disrupting decision-making. The current emerging-market nervousness, for example, has helped send the rupiah to its lowest level against the US dollar in many years.

But, all too often, Southeast Asia is overshadowed by its big and more populous regional neighbours, China and India. Australia’s long-term economic growth depends as much on ASEAN as these economic giants – and Indonesia will likely be a critical part of this equation.