Indonesia: Back on track

With live cattle exports from Australia to Indonesia resumed and plans for banking investment and a free trade deal in the works, burgeoning economic ties between the neighboring countries seem back on track.

Canberra announced on July 6 that it would restart live cattle exports to South-east Asia’s largest economy after a controversy over livestock conditions provoked a one-month ban, stating that it was satisfied the animals would not be mistreated and the $341m trade could restart.

While the fallout from the cattle crisis grabbed headlines, trade links were advancing on other fronts. In early July Ralph Norris, the CEO of Australia's Commonwealth Bank (CBA), announced plans to nearly double its presence in Indonesia over the next few years as it seeks new sources of growth.

One particular area of focus for the bank is the emerging affluent market – those aged 28-40. According to Tony Costa, the president director of Commonwealth Bank Indonesia, technology will play an important role in its outreach efforts to this segment. “As a means to better serve those clients we have launched an aggressive mobile banking campaign. By utilizing internet-based technologies our clients, through their phones, have improved accessibility to our product and services,” Costa told OBG.

National Australia Bank also said it was mulling plans to open its first branch in Indonesia. Australia’s ANZ Bank has already injected A$1.2bn ($1.28bn) into the economy and built up assets worth A$2bn ($2.14bn) to date.

The Indonesian banking industry is currently enjoying an improved financial environment buoyed by surging exports, which reached $18.33bn in May, a 45.29% increase year-on-year. This month, the government raised the 2012 GDP growth forecast to as much as 7%.

While in the past most Australian investment has focused on natural resources, a range of additional opportunities for investors have opened up in recent years. According to Costa, small and medium-sized companies are playing a growing role too. “Australian investment in Indonesia, which has traditionally been led by companies with a clear focus on the exploitation of natural resources, has experienced increased growth in terms of the number of small and medium-sized enterprises that are interested in entering a more diverse range of sectors,” he told OBG.

The construction sector also seems to hold significant potential, with Indonesia’s plans to double spending on roads, ports and airports to $140bn by 2014 representing a considerable opportunity for Australian firms. Companies well positioned to profit from this include Thiess Contractors Indonesia, one of the country’s largest contractors and an active player in the market since 1972.

Thiess’s recent local projects include a number of toll roads and mining developments. At the end of June, the company signed concession agreements covering three toll roads with the Indonesian Toll Road Authority, with total investment estimated at $1.3bn. Set for completion in 2014, the three projects will take the form of public-private partnerships with the government.

Leighton Contractors has also made several strategic local investments over the years, such in a modern plant fleet with a value of $300m. Another player in construction is BlueScope Steel, an Australian steel and building solutions manufacturer. The firm will complete commissioning of its second metallic coating line this year at a $135m plant in Cilegon, 100 west of Jakarta.

In aviation, Canberra announced in July that up to 27,500 seats per week will be made available to Australian and Indonesian airlines operating between the countries, after the signing of a memorandum of understanding. Virgin Australia quickly lodged a request following the pact to add 2800 seats per week to its flights between Australia and Bali from April next year.

“In the 12 months to April this year, more than 1.8m people travelled between Australia and Indonesia. The … market has been growing at an average of 32% every year over the past three years,” the federal minister for infrastructure and transport, Anthony Albanese, said in a statement.

Observers believe Indonesia’s geographical proximity to Australia and abundance of natural resources make it an ideal partner for Canberra as it seeks to expand into the Association of South East Asian Nations region. While bilateral trade reached $12.6bn in 2009-10, talks are ongoing over an Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) that would deepen trade integration. Indonesia is currently Australia’s 12th-largest trading partner and 10th-largest export market.

Of course, challenges remain as Indonesia works to increase foreign direct investment (FDI) into the country, with the introduction of additional incentives and tax holidays a potential help in this regard. “FDI has experienced positive increases, demonstrating the interest level of companies looking to capitalise on the economic growth of the region. However, fiscal incentives and tax holidays are a necessary step if the country is to remain competitive and attract FDI in larger quantities,” Mike Gundy, the president director of BlueScope Steel, told OBG.

In April, Australia’s trade minister, Craig Emerson, visited Jakarta for talks with his Indonesian counterpart Mari Elka Pangestu on the IA-CEPA. “As the two largest economies in South-east Asia, there is considerable scope for Australia and Indonesia to strengthen and expand their economic relationship,” Emerson said of his visit. “The Indonesian economy, with 234m people, has been growing strongly and could be in the top 10 globally by 2025,” he added.

The IA-CEPA’s initial project is a joint three-year beef pilot initiative aimed at improving Indonesia’s cattle breeding performance, which seeks to transfer knowledge and develop skills that will lead to long-term sustainable growth in the Indonesian beef industry. The export ban had significant impact on Australia’s cattle industry, with pressure from the sector believed to have influenced the reversal.

However, while the resumption of cattle trade bodes well for bilateral ties, another potential conflict looms over Australia’s plans to make all products containing crude palm oil (CPO) bear explicit labels marking the ingredient.

Officials in Indonesia, which is the world’s largest palm oil producer, have said the move, formed in response to environmentalists’ claims that the CPO industry is unsustainable, is discriminatory and potentially breaches WTO rules.

“It is discriminatory toward palm oil as there’s no scientific evidence to support the idea that palm oil damages human health,” the chairman of the Indonesian Palm Oil Producers Association, Fahdil Hasan, told the Jakarta Post in July, adding that scientific research showed palm oil was beneficial.

As two large and ambitious neighbors, relations between Australia and Indonesia have not always been easy in the past. However, Jakarta’s burgeoning democracy, economic success and wealth of resources are good reason for Canberra to get past the squabbles of the past and embrace Indonesia’s status as an emerging regional economic and political heavyweight with great potential.