As Indonesia moves closer towards a pivotal national election, I thought it might be useful to set out a few trends to keep in mind going forward.
- China: As Indonesia’s most important economic partner, China will remain key to Indonesia’s future. China is Indonesia largest two-way trading partner and Indonesia’s is China’s second most preferred investment destination. It was the first country to buy into Indonesia’s mineral export bans and make sizable investments in downstreamed products. It was not the first to invest in the sector (companies such as Freeport and Vale have had smelters for decades), but it built the first plants to process nickel into MHP, a key ingredient in electric batteries. Indonesia recently announced that a Chinese company will build one of the world’s largest glass and solar panel facilities on Rembang Island, known for its quartz and silica sand. The two leading Presidential candidates, Prabowo Subianto and Ganjar Pranowo, have met often with Chinese officials, although Ganjar, as a governor, has more experience working on investments. These candidates are likely to build on Jokowi’s warm and “frictionless” relationship with China, facilitated by Indonesia’s cast of oligarchs, whose track record with Western financial institutions is checkered. Anies Baswedan, third in polls currently, could re-shift the relationship given his past criticisms of Indonesia’s “deference” to Chinese economic interests. China’s economic model (based on large state-owned companies) is increasingly attractive to Indonesia.
- De Dollarization: Indonesia joined an effort with other SEA nations to move away from the dollar (announced at the recent ASEAN Summit) as the means of exchange in international transactions. Currently, nothing concrete has emerged from a government task force, although previously Indonesia signed agreements with like-minded neighbors. This trend is worth following but is unlikely to affect US-Indonesia’s transactions as it wouldn’t be in Indonesia’s interest because it perennially sells twice as much to the US as it buys. However, US companies (and AICC members) do trade Indonesian products in markets throughout the world. It’s conceivable that a mandate to use local currencies in limited circumstances could arise.
- Anti-Globalization: Export bans, local content mandates, elevation of the role of government-owned enterprises, and efforts at using regional currencies for transactions are changing the equation for international trade and investment. Slower growth is a likely consequence as nations also pursue food and vaccine/medical self-sufficiency and hoard natural resources, while simultaneously promoting exports and inward investment. The policy confusion may hit more on investment as even Indonesia’s own BKPM (investment facilitation agency) recently acknowledged when its Deputy remarked that investments in the future will be affected by the economic nationalism of other countries. Of course, groups such as the WTO and the IMF point to Indonesia’s own resource nationalism. In its annual report on international trade, economists with the World Trade Organization (WTO) argued in favor of “reglobalization” as “the first signs of trade fragmentation threaten to slow growth and development”. Shield your eyes during the upcoming Presidential campaigns in the US and Indonesia, there’s bound to be anti-global and anti-foreign rhetoric.
- Energy: Indonesia’s energy policy remains embedded in coal, notwithstanding rhetoric to the contrary. Its transition to renewables is genuine but it appears to be more of a diversification program. Coal fired power will remain for many years, however, as Indonesia argues that it cannot risk economic growth by moving too quickly. Indonesia’s Parliament recently rejected a $651 million funding request by PLN part of which was targeted for renewable energy. That reflects the influence of the coal lobby.
- Commodities: US buyers of kratom can applaud efforts by AICC and the American Kratom Association to ward off a 2024 export ban that Indonesia had announced in reaction to communications from FDA, which considers kratom a quasi narcotic. The leaves of kratom trees, which are indigenous to Indonesian wetlands, have been used for centuries by medicinal healers to treat pain. Indonesia has 90% of the US market for kratom, where users report its benefit in curtailing opioid addiction, among other uses. 12 states have passed consumer protection legislation. Studies funded by the National Institute of Drug Abuse (NIDA) and other institutions challenge FDA’s findings. According to laboratory animal studies, kratom effects the same pain receptors as opioids such as heroin but is not addictive. After meeting with a US delegation of vendors and legislators in 2022 and 2023, Indonesia’s Trade Minister Zuklifi Hasan told reporters the US had made inquiries about the export of the Southeast Asian native plant, familiarly known as kratom, inquiries which he said would welcome with open arms. “I agree to anyone who’s thinking of exporting [kratom]. There is no [prohibition in place].” Many other herbal products from Indonesia could do well in the US but require high marketing budgets.
- Digital Economy: Its no longer possible to ignore the amazing use of smart phones in the consumption patterns of Indonesians. A Citi report recently tapped countries such as Indonesia as “time machines” for a glimpse into America’s future. Indonesia’s young population, high connectivity, and relative lack of hard infrastructure have all combined to ease the adoption of digital wallets, and apps merging social media and e commerce. Indonesian consumers do more transactions via their phone than Americans. Indonesia’s central bank expects to be the first digital central bank, but will continue to ban the use of cryptocurrency.
The process of nominating Presidential and Vice-Presidential candidates for the February 2024 national elections has looked like a game of musical chairs with parties daring each other to sit down first. This week one of the 3 candidates sat down: PKB, a party with strong roots in the key province of East Java, agreed to have its chairman Muhaiman Iskandar, become the VP candidate with Anies Baswedan. PKB reneged on its previous agreements with two parties, Gerindra and PD. This week also saw PDI-P seemingly offer Ridwan Kamil of Golkar to be Ganjar Pranowo’s running mate. However, the deal may be subject to Golkar’s chairman Airlangga Hartarto, who may be looking to be the running mate of Prabowo. So, the game continues. It will end in October when slates must be formally submitted to the Elections Commission. The role of President Jokowi and his son Gibran (who could become a VP candidate if the Constitutional Court allows age requirements to be lowered) will be key. The President has publicly appeared neutral. With an 80% approval rating, if he tips his hand many will follow him. Polls show almost equal support for Prabowo and Ganjar with Baswedan a distant third. However, Prabowo has the lead in polling for a two person race.
The US gets as much negative ink as positive regarding its engagement with Indonesia. Its true that President Biden “skipped” last week’s ASEAN and East Asa Summits (hosted by Indonesia) to meet with Vietnam and that Indonesia regularly shortens the term of their ambassador. But Biden met Jokowi on the sidelines of the G20 and he has invited him to Washington in November, before the APEC Leaders Meeting in San Francisco. Vice President Harris took Biden’s seat at the ASEAN Summit and had a one-on-one with Jokowi. It may irk some that statements on Russian and Chinese military aggression were muted. This seemed to be fine with the US and could be a sign of maturity that it understands that unilateral demands are not welcome in the region. However, proving US support for the third largest democracy in the world, that has made remarkable reforms and achieved consistently growth rates even through the pandemic, has been challenging. A 2022 multilateral pledge of $20 billion for energy transition away from coal has yet to amount to very much, and the 3-year-old Jakarta office of the US Development Finance Corporation has yet to announce any significant investments or loan guarantees. There may be valid reasons for all of this, for example the lack of capacity on Indonesia’s side to agree to stipulations and carry them out to get the money, but, the public narrative is that Chinese funds are way more easier to obtain. The US-Indonesia military relationship remains on solid footing with plenty of interest in US equipment and a wide array of joint training exercises. The bilateral relationship will go into a holding pattern in 2024 as each country holds national elections and positions new ambassadors replacing Rosan Roeslani(Indonesia) and Sung Kim (US).
The EU and WTO, to be colloquial, are continuously on Indonesia’s case, whether it be mineral export bans, stainless steel dumping or import controls on palm oil. Indonesia sees the cases as evidence of neo-colonialism, reacting with sharp rhetoric. The generation of Indonesian trade officials who believed in multilateralism and respected institutions such as the WTO, has sadly left the stage for the most part.
(The view representing are the writer’s own and are not necessarily shared by members of the American Indonesian Chamber of Commerce)