Australia Seeking To Capitalize on Indonesia’s Growth

By webadmin on 08:40 am Feb 18, 2013
Category Archive

Eileen McInnes

As members of the Group of 20 nations, Australia and Indonesia should be rivals. Both strive to be among the 10 biggest economies in the world in the next decade, and each has the resources to accomplish that.

The two nations are also aware of each other’s ambitions. As a roadmap to achieve its goal of becoming a top 10 economy by 2025 and to increase its relations with other Asian nations and move further into regional markets, Australia issued in October a strategic report titled Australia in the Asian Century White Paper.

In the report, Australian Prime Minister Julia Gillard called on Australians to become “a more Asia-literate and Asia-capable nation.” Indonesia, China, India, Japan and South Korea were listed as five priority countries.

As Australia embarks on its plan to increase trade and investment with Indonesia, there are hurdles to overcome in order to do business, including concerns of protectionist measures and a lack of private initiatives. Some Australian observers have criticized the white paper’s lack of allocation in resources — namely money and manpower — to support the government’s policy toward Asia.

Andrew O’Neil, director at the Griffith Asia Institute in Brisbane, expressed concern that the government was focusing on trying to balance its budget and was not doing much to promote Australia through foreign affairs and suggested that more diplomatic resources were needed.

Private initiative

“In times of fiscal austerity, the temptation for governments is to cut the numbers of personnel and the scale of representation,” O’Neil said in an e-mail last month. The institute is a research division of Griffith University.

One consultant, though, says that it should be private businesses that need to be proactive in expanding into Asia, an initiative that is lacking at the moment.

“It’s businesses and consumers that drive engagement more than governments,” said Ross Love, managing director of Australia and New Zealand at the Boston Consulting Group in Sydney. “But that’s not to say that governments aren’t important.”

Governments can assist by creating an environment of “free trade, transparent regulations, reducing tariffs and free flow of goods and good finance regulation,” he said.

Indonesian-Australian trade relations have been strained in the last few years, evident with such cases as the treatment of livestock and restrictions on shipments.

A documentary by the Australian Broadcasting Corporation highlighted abuse of Australian cattle at abattoirs in Indonesia, which resulted in a temporary ban on live cattle exports for several weeks in 2011.

Policies by the Indonesian government have also contributed to an uneasy outlook for trade relations between the two countries.

In mid-June 2012, the Indonesian government restricted the ports of entry for many horticultural products, including those from Australia, because of changes in regulations. The Tanjung Priok seaport in Jakarta — also the biggest in Indonesia — halted shipments of many types of fruit and vegetables.

“I am concerned that there are increased instances of protectionism in some sectors of Indonesia’s market,” Australian Ambassador to Indonesia Greg Moriarty said in an e-mail. “These policies are not aimed specifically at Australia, but they do affect Australian interests, including in the food trade, mining and banking sectors.”

Agost Benard, credit analyst on Indonesia at Standard & Poor’s Ratings Services in Singapore, said that Indonesia’s trade policy could well turn more protectionist, and some actions it has taken to ward off influence from other nations are affecting other countries indirectly.

Ad hoc policies

“We have seen manifestations of this through policy measures that were also somewhat ad hoc,” Benard said in a phone interview from Singapore last month. “It is an example of uncertainty for foreign exporters and investors.”

Similar cases of changes in trade have undermined confidence in Indonesian policy. The government last year revoked the ban on the export of unprocessed minerals. The ban was meant to encourage local businesses to refine their goods as part of a value-added measure.

In the last two years the Trade Ministry has attempted to limit imports of tea and potatoes to protect local industries.

“These are the kind of surprises exporters are likely to have to deal with in the future,” Benard said. Protectionist policies “mean that the policy environment is unpredictable and could negatively affect investment,” he added.

Indonesia is yet to receive an investment rating from S&P, with Benard telling the Jakarta Globe last month that while quantitative indicators remained positive, a lack of infrastructure and reform in the government’s economic policies hindered the upgrade.

Despite such concerns, the Indonesian Australian Business Council is optimistic that the Indonesian-Australian Comprehensive Economic Partnership Agreement (CEPA) in the context of the white paper will have positive results.

The two countries are currently partners in the Asean-Australian-New Zealand Free Trade Agreement and are looking to strengthen ties through the CEPA, negotiations for which began last September.

IABC secretary general David Sutanto said in an e-mail this month that “the CEPA will further improve this [trading relations] and reduce frictions should they arise in the future.”

Challenges to trade

A few Australian companies are poised right now to take immediate advantage of the growing consumer and investment markets in Asia.

At the Australian Export Award Gala in Canberra in November, 12 leading export companies — most with business operations in Asia — in different industries were recognized. Trade Minister Craig Emerson said that “as we turn our attention to the next wave of opportunity the Asian Century will bring, exporters will play a more important role than ever.”

Oniqua MRO analytics, a software provider with operations in Bali, won the small to medium services award. SunRice, a rice exporter that expanded into the Indonesian market in 2011 and 2012, won the regional exporter award.

In terms of fostering an environment of open and freer trade, Australia and Indonesia seem well poised for the future.

On March 1, the Australian government will begin accepting applications from small to medium-sized businesses for grants to facilitate movement into Asian markets. The Asian Century Business Engagement Plan, which started in December by Trade Minister Emerson, will initially be funded by A$6 million ($6.2 million) to encourage businesses to set up operations in Asia.

Guidelines indicate grants of A$25,000 to A$300,000 will be awarded “on merit after a competitive application process.”

Indonesia is currently ranked as the 12th-largest trading partner to Australia, with two-way trade in goods and services totaling $14.8 billion and Australian investment in Indonesia worth an estimated $5.4 billion, according to the Australian Embassy in Jakarta.

Corresponding resources

The embassy estimates more than 400 Australian companies are operating in Indonesia, in sectors including mining, agriculture, construction, infrastructure, finance, health care, food and beverage and transportation. To accomodate the rise in relations between the two, Australia is expanding its Jakarta embassy — already the nation’s biggest outfit — to house more employees when operations begin in 2015.

In many ways the resources of the two correspond to either nation’s needs.

Australia and New Zealand Banking Group, whose largest banking network outside of Australia and New Zealand is in Indonesia, says that interest in the Indonesian market had existed before the release of the white paper.

“In the past five years, there has been an enormous increase in the interest of companies and investors moving into the Indonesian market,” ANZ chief executive Joseph Abraham said in an e-mail last week.

He said that natural resources, infrastructure and agriculture would be some of the areas in which “investment and development will be extremely crucial” for Indonesia’s growth.

“We do see the Australian and Indonesian economies as being quite complementary,” Abraham said. “With strengths in agriculture and natural resources, demand that is driven by domestic consumption, and with Indonesia having a need for infrastructure development, with which Australia is able to assist.”

More Australian companies might benefit if they make the move into the Indonesian market, and Indonesia has many attractive conditions for foreign investors and exporters. As the largest economy in Southeast Asia, Indonesia has, for three consecutive years, retained a growth of more than 6 percent. Its economic expansion at 6.23 percent in 2012 was about double the pace of Australia’s.

Indonesia’s population of more than 240 million — compared with Australia’s 22 million — has a rapidly growing middle class.

Food production

The economy relies heavily on spending in the consumer industries and the high savings of the middle class. Indonesia’s per capita income almost doubled in the past six years to $3,562 in 2012. Indonesians had about 120 million saving accounts valued at Rp 3,277 trillion ($336 billion) in Indonesian banks last year, according to data from the Deposits Insurance Agency. That is equivalent to about 40 percent of the country’s gross domestic product.

With Australian companies such as ANZ, Leighton Holdings and BHP Billiton entrenched in the banking and mining sectors, the Australian government is looking toward food production as the country’s next biggest venture in Asia.

“Australia’s farmers will be front and center of increased demand for high-quality agricultural products to feed the growing middle classes across Asia,” Ambassador Moriarty said.

At $2.3 billion, Indonesia is already Australia’s third-largest agriculture export market. Majority exports come from wheat, with Australia exporting A$1.15 billion worth in 2011.

Addressing the Global Foundation Summit Dinner in May last year, Gillard noted Australia’s potential to become a regional food superpower.

“Just as we have become a minerals and energy giant, Australia can be a great provider of reliable, high quality food to meet Asia’s growing needs,” she said.

The government has received support for this food plan by various Australian companies. Most notably, the Global Foundation — an independent network that counts some Australian companies like SunRice as a member — released a National Food Plan in October 2012 in which Australia was branded to become the “clean, green, food bowl of Asia.”

The Global Foundation believes Australia has the capacity to feed 200 million people per year, which is about a third of Southeast Asia’s population of 620 million people.

Resources and energy

Still, the white paper forecasts that by 2025 Australia’s mining industry would account for more than 60 percent of all exports to Asia. Services on the other hand would be a little more than 15 percent.

Despite this optimistic outlook for Australia’s venturing export companies, Love of BCG warned that this would not be enough to realize the goals of the white paper.

“It’s not enough to trade on our [Australia’s] resources and energy,” Love said.

Detailing the advice that BCG gives to Australian businesses and other Western businesses that are either moving into and already operating in the Southeast Asian region, he said that some steps “take longer than people expect or want,” particularly in the area of developing solid business relationships.

Love said that it’s not simply a question about any single industry doing well in Asia, but more so about approach, understanding and expertise.

For example JetStar — an Australian low-cost carrier that had consultations with BCG — has operations in Singapore, Vietnam, Japan and now Hong Kong, Love said. He attributed its success in establishing its presence in multiple countries not only to relationship building but by being able to “adjust their business model each time to the local market.”

The future of trade in terms of exports from Indonesia to Australia is less clear.

The white paper specifically pinpoints Australia’s interest in low-cost manufactured goods sourced primarily from Asia. Indonesia’s trade in iron, steel and aluminium structures amounted to A$669 million in 2011, according to Australia’s Department of Foreign Affairs and Trade. Crude oil was the most shipped good to Australia, amounting to A$2.371 billion, while gold was third at A$649 million.

Trade focus

Despite registering strong growth, the Indonesian economy faces uncertainty in its future export market.

Indonesia for the first time in more than a decade registered a trade deficit in 2012, partly due to a global downturn that reduced prices for commodities like those of palm oil and coal.

The imbalance in trade could possibly shift through efforts in increasing two-way investment and improving Indonesia’s ability to trade, such as developing infrastructure, Ambassador Moriarty said.

“Capacity-building in Indonesia will involve sharing expertise in order to increase the amount of food Indonesia can produce,” Moriarty said. “This will lower the amount of food that Indonesia needs to import from abroad. It will also help to keep the price of food in Indonesia affordable and provide jobs and income.”

The IABC is also concentrating on a similar strategy. Sutanto said that capacity building is aimed at improving the level of skills of the Indonesian workers and business practitioners, especially exporters.

Examples of capacity building and infrastructure development in Indonesia are already under way, with ANZ reported to have channeled loans in the amount of more than $1.2 billion. The largest of these loans will go toward state-owned Perusahaan Listrik Negara’s $2 billion power plant projects in Sumatra and Sulawesi.

“ANZ has participated in supporting the development of infrastructure and state-owned enterprises in Indonesia, where we have been successful in channeling loans to assist the infrastructure and the natural resources sectors,” Abraham said.

“We see Indonesia as one of the most open markets to welcome foreign investment. There is still a need for greater Australian participation in the Indonesian economy, and vice versa.”

 

This is the last article in a series focusing on relations between Indonesia and Australia.