Warming Relations for Indonesia and Singapore

30 November 2016 Reece McCullough, Research Assistant, Indian Ocean Research Programme

Background

As Indonesia and Singapore celebrate the fiftieth anniversary of formal diplomatic ties, the partnership is now one of vital importance to both countries. To further improve bilateral trade and economic productivity, Indonesian President Joko Widodo and Singaporean Prime Minister Lee Hsien Loong held a leaders’ retreat in November in the Indonesian port city of Semarang. The retreat covered the growing interconnectivity of the two economies and will hopefully set the groundwork for future joint projects and increased investment between the two neighbours.

indonesia-singapore-leaders

Comment

A strengthening of relations between the two countries brings relief at a time of growing uncertainty in the Asia-Pacific region. When the two leaders last met in July 2015, it sparked a wave of Singaporean investment into Indonesia, and there are hopes that that will occur again, to be led by the inauguration of a new joint venture industrial park in Kendal, Central Java, by Indonesian developer PT Jababeka and Sembcorp of Singapore. The Kendal hub is set to manufacture clothing, automotive parts, food, beverages and cosmetics, and may signify a new interest on the part of Singaporean investors to move beyond the traditional investment locations of Jakarta and Batam.

Economic ties between the two countries have grown dramatically over the past two decades, with bilateral trade growing from US$10.4 billion ($14.1 billion) in 2000 to US$41.5 billion ($56.2 billion) in 2015. Singapore also represents Indonesia’s second-largest source of imports, after China and, while the export figures are still significant, Indonesia is expressed concerns at the growing trade imbalance with the island state. While Indonesia’s overall balance of trade is satisfactory, with exports exceeding imports, the 2008 financial crisis together with dramatic changes to global oil markets has led to a reversal of its trade balance with Singapore. In 2000, Indonesia’s net trade balance with Singapore was in surplus at US$2.8 billion ($3.8 billion) – a sharp contrast to the US$8.5 billion ($11.5 billion) deficit recorded in 2014.

The burgeoning relationship has not been without its challenges. The recurrent South-East Asian Haze crisis, linked to illegal slash-and-burn land clearing practices in Indonesia, has caused concern throughout the region. When Singapore raised concerns in 2013 over the intensity of that year’s haze, the Indonesian Minister for People’s Welfare complained that ‘Singapore shouldn’t be behaving like a child and making all this noise’. A subsequent offer from Singapore to provide assistance with fire-fighting teams, satellite imagery and a helicopter was also rejected. Jakarta has since rebuked a 2016 study published by Harvard and Columbia universities that claims that more than 100,000 premature deaths occurred in 2015 and were directly attributable to Indonesian forest fires. The Health Ministry responded by saying that the report made ‘no sense at all’, which aligns with dubious government records that show only 24 deaths related to forest fires in that same year. Indonesia’s disaster agency has recently stated that the upcoming haze season should be considerably lower than that of 2015, but it the issue is not likely to be resolved in the near future.

There have also been accusations from Jakarta over what it sees as a lack of effort by Singaporean officials to assist Indonesia in its fight against financial crime. Amid revelations from the 2016 Malaysian financial scandal, and in an attempt to curb financial crime and money laundering, questions have been raised over the actions and behaviour of the Singaporean banking sector. A tax amnesty initiative launched in 2016 by the Indonesian Government has returned billions of dollars to the economy, with 57 per cent coming directly out of the Singaporean financial sector. There have also been ongoing discussions over the management of Indonesian airspace by the Singapore aviation authority, which has the potential to become an issue in the future. Disputes stemming from these issues could be eased as mutually beneficial trade grows further and increased investment draws the two neighbours closer together, potentially facilitating more effective lines of communication and a greater appreciation of the other country’s circumstances.

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