Commentary | 10 March 2019

Deal will help tame Indonesia's risks

Originally published in Australian Financial Review

Originally published in Australian Financial Review

Indonesian businessman John Riady likes to joke that his country is the "world's largest invisible object". No other nation is so big in size (spanning 5300 kilometres from east to west) and population (260 million people), yet so little understood beyond its borders (hence the need for the statistics in brackets).

Similarly, for many Australian companies, Indonesia is their "largest invisible market". It's big, it's close and it's growing fast – but it just seems too complicated and difficult to do business there.

Australia did more two-way trade with the smaller, more open Southeast Asian economies of Malaysia, Singapore and Thailand in the last fiscal year than it did with Indonesia, the region's biggest economy and Australia's nearest Asian neighbour.

Many Australian investors are happier with the predictability, comfort and stability of New Zealand than the rough-and-tumble, and vast potential, of Indonesia.

There are less than 300 Australian companies on the ground in Indonesia, with $11bn invested, compared to 12,000 companies and $86 billion invested in New Zealand, according to the Australia-Indonesia Business Council.

The Indonesia-Australia Comprehensive Economic Partnership Agreement, which was signed last Monday, is intended to address the imbalance between the grand rhetoric of neighbourly relations and the prosaic reality of under-developed trade and investment ties.

After nine years of tough negotiations and numerous mishaps, the Australian government is right to call the IA-CEPA an historic agreement.

Both governments have pledged to reduce tariffs and other trade barriers, with Indonesia promising to open up sectors such as health, education and tourism to significantly higher levels of Australian investment. The Australian government has also agreed to improve market access for Indonesian exports and offer more working holiday visas and educational opportunities.

The negotiators deserve credit for getting the deal over the line ahead of elections in both countries. In Indonesia, protectionism is normally seen as a vote winner and the government has not signed a bilateral trade deal with another G20 nation for a decade.

But, in many ways, the hard work starts now.

First, both countries need to ratify the deal. Even then, officials on both sides do not expect an immediate flood of new trade and investment. Rather, they hope to use the deal as a marketing tool.

Ultimately, the success or failure of the IA-CEPA will hinge on the actions of companies. So why aren't Australian companies doing more business with Indonesia?

Although nations tend to trade more with their nearest neighbours, proximity has not protected Australian companies from falling foul of the corruption, interminable bureaucracy and legal uncertainty that bedevil all foreign investors in Indonesia.

Meanwhile, Australian companies, blessed by 27 years of uninterrupted economic growth at home, have had fewer reasons to enter risky overseas markets than their counterparts in cyclical Singapore and South Korea.

That's why even senior Indonesian officials can struggle to fill a room with serious investors when they visit Australia for business promotion events.

On a quarter-by-quarter or year-by-year basis, Indonesia simply looks too risky for many Australian companies.

But, for those with a longer-term view, there are big opportunities to sell to a growing Indonesian middle class that is hungry for higher quality goods and services from beef and vegetables to education and tourism.

The IA-CEPA will help to reduce some of the risks and costs of reaching that market.

The commitment to avoiding non-tariff measures is particularly welcome, given the propensity of Indonesian officials to curb imports and stymie foreign investment when they are politically inconvenient.

But this deal will not by itself make Indonesia an easy place to invest and trade. Nor will it shield Australian companies from the vicissitudes of Indonesian politics and future hiccups in the bilateral relationship.

Hopefully, though, it will prompt Australian investors to look again at Indonesia.

The potential rewards are significant, as Southeast Asia's biggest economy moves away from a reliance on raw commodity exports. Indonesia needs capital and know-how to improve education, healthcare and other services, revamp its faltering manufacturing industry and accelerate growth in e-commerce and mobile payments.

Like all foreign investors, Australian companies will have to work hard to reap the benefits and will need to tolerate a degree of risk and turbulence. In Indonesia's highly decentralised system, getting permits is not a one-off market entry exercise but an ongoing negotiation with the byzantine bureaucracy.

Rules on everything from local content requirements to expatriate work visas will keep changing – and often be as clear as mud.

And the local tycoons and state-owned companies that dominate the economy will always be looking for ways to hobble their foreign rivals.

But such inefficiencies define emerging markets. The long process of ironing them out will keep the Indonesian economy growing at a healthy, if not spectacular, clip for years to come.

Australia has a strategic interest in deepening economic and trade ties with Indonesia, especially as both countries share concerns about their reliance on an ever more assertive China.

Australian companies, however, do not make investments solely to support geo-political strategy or government priorities.

They need to be persuaded that they can make enough profit to mitigate any unpredictability.

By itself, IA-CEPA is not a game-changer. It is more like a long bridge connecting neighbouring but faraway islands. Putting it together was an impressive technical feat that took many years. But the real tests of its success will be, firstly, whether the builders can maintain it through the inevitable storms to come. And, secondly, whether businesses and people will feel it is worth their while to use it on a regular basis.