IA-CEPA Enters Into Force: Poor Timing for Indonesia?

8 July 2020 Jarryd de Haan, Research Analyst, Indo-Pacific Research Programme

Background

The Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) came into force on 5 July, a year after the deal was signed in March 2019. The highly-anticipated deal took nine years of negotiations and provides an opportunity for closer economic ties by enabling more bilateral trade through reducing tariffs and greater access to Australian investors through increasing ownership caps. As the deal has come into force, however, Indonesia is faced with a COVID-19 outbreak that threatens to spiral out of control.

Comment

If businesses take up the opportunity, IA-CEPA could see a significant bolstering of the economic relationship. As it currently stands, bilateral trade and investment figures are surprisingly low given the close proximity of both countries and the size of the economies. As an example, Australia’s level of investment into Indonesia in 2019 reached $8.2 billion, less than what is invested in other countries in the region including Singapore ($84 billion), Malaysia ($12 billion), Philippines ($10.2 billion) and even Papua New Guinea ($16 billion).

For the time being, however Indonesia’s primary focus is dealing with COVID-19. Since the first official case was recorded on March 2, the number of total cases in Indonesia has continued to increase at an exponential rate and has reached 66,226 at the time of writing. As a previous Strategic Weekly Analysis reported, however, those figures are likely much higher in reality and will continue to grow.

In conjunction with imposed restrictions, as a consequence, manufacturing levels and exports from Indonesia have dropped considerably. According to a release by IHS Markit, Indonesia’s Manufacturing Purchasing Managers Index (PMI) plunged to from 45.3 in March to 27.5, where a reading above 50 indicates growth on the previous month and below 50 reflects a decrease. Commenting on those statistics, Bernard Aw, Principal Economist at IHS Markit, noted that:

The latest reading is approximately indicative of GDP growth slowing sharply to an annual rate approaching 3%. Factory closures and tighter social distancing rules led to a collapse of production and demand. Both output and new orders fell at record rates. Consequently, factory layoffs were also widely reported. Firms also faced greater cost burdens as a combination of material shortages and the weaker rupiah fuelled inflation. The survey underscores the unprecedented damage to the Indonesian economy from emergency public health measures to curb the spread of the virus, which has contributed to slumping global demand and shortages of input materials.

That situation appears to have had a significant impact on Australia’s import of Indonesian goods. Statistics from May 2020 show that imports from Indonesia were down 37% compared to May 2019, the largest monthly drop in year-on-year growth since July 2012. Comparatively, the average year-on-year growth for the past five years has been 8.5%.

From Jakarta’s perspective, however, merchandise trade is not where Indonesia will benefit the most out of IA-CEPA. Rather, as noted by a previous Strategic Weekly Analysis, the deal offers an opportunity for Indonesia to close its skills gap, as Australia can play a pivotal role in its education sector. The skills shortage in Indonesia has been recognised by the government, with President Joko “Jokowi” Widodo declaring in 2019 that ‘Within the next five years, Indonesia will drive its priority focus on human resources improvement, including the development of vocational education and higher education sectors’. Tom Lembong, the head of Indonesia’s Investment Coordinating Board has also stated that he considers the solution to Indonesia’s skills problem to be Chinese capital combined with Australian training.

While Indonesia grapples with COVID-19, however, addressing its skills shortage will likely be put on hold as for Australia to effectively provide training and invest into education, borders will need to be freely opened between the two countries. The prospect of business co-operation also seems difficult to manoeuvre at this stage. The severity of the COVID-19 crisis in Indonesia compared to Australia means borders could remain restricted for some time, so while IA-CEPA has been put in force, it is not good time to do business in Indonesia.

Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

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