Indonesia Country Brief - March 2008

Introduction/overview

Australia and Indonesia are close neighbours, whose relationship ranges across political, security, commercial, cultural and people-to-people links. The strength of the relationship can be seen in the depth and breadth of high level exchanges between leaders, ministers and prominent people of both countries.

Australia and Indonesia cooperate in practical ways on a wide range of international issues, including counter-terrorism, illegal fishing, people smuggling, avian influenza, climate change and interfaith dialogue. Australia is committed to a long-term development partnership with Indonesia. In 2007-08, Australian aid to Indonesia will be worth $458 million, making Indonesia the largest recipient of Australian aid.

Security cooperation will be enhanced by the Lombok Treaty, which provides a unique treaty-level framework for addressing traditional and non-traditional security challenges. Indonesia and Australia have a healthy trade and economic relationship with two-way trade worth $10.4 billion (2006-07) and two-way investment worth around $3.5 billion (2006).

Political overview

Government and Politics

Indonesia is a unitary state, headed by an executive President and Vice President who are directly elected for a five-year term by popular vote. The President and Vice President govern with the assistance of an appointed Cabinet. Indonesia’s 678-member parliament includes a 550-member House of Representatives (DPR), with the authority to make legislation, determine the budget and oversee the implementation of legislation by the Cabinet, and a 128-member advisory body called the House of Regional Representatives (DPD), with four representatives from each Indonesian province.

Recent Political Developments

Indonesia has experienced a significant political transformation since May 1998, following the fall of the Suharto Government which had ruled Indonesia for 32 years. The country has since undergone major changes, transforming itself from an authoritarian regime into a democratic and decentralised state.

Susilo Bambang Yudhoyono was inaugurated as Indonesia’s sixth President on 20October 2004 following the second round of presidential elections in which he won 60 per cent of the vote. Parties supporting the President and Vice-President now have a majority in the parliament, giving the Yudhoyono-Kalla Government greater capacity to progress its agenda.

The decentralisation process, underway since 1999, has transferred control of large amounts of public expenditure and service delivery from the central government to over 450 provincial and local governments.

Economic overview

Indonesia was the country most affected by the 1997-98 East Asian financial crisis and only regained pre-crisis levels of real GDP in 2004. Owing to the severity of the economic impact, Indonesia received IMF assistance programs for six years, graduating in December 2003. Indonesia’s GDP growth in 2006 was 5.5 per cent.

While solid economic growth has returned in recent years, Indonesia’s GDP growth rates have tended to lag behind those of its South-East Asian neighbours. Indonesia needs economic growth of about 7 per cent a year to absorb new entrants to the workforce and to reduce the large numbers of unemployed and underemployed.

Indonesian Government’s target inflation range for 2008 is 6.0-6.5 per cent. After successive rate rises in late 2005 (as a result of the ‘mini Rupiah crisis’ of August 2005), Bank Indonesia successively eased interest rates in 2006 and the first half of 2007. The financial sector continues to improve with stronger capital adequacy, loan growth and profits.

Foreign investor sentiment towards Indonesia has improved with the election of President Yudhoyono and his Government’s determination to improve economic growth and the investment climate, including by improving infrastructure, strengthening the legal framework, enhancing governance and reducing fuel subsidies.

Indonesia faces major reform and structural challenges which will need to be addressed if sustainable levels of GDP growth are to be achieved to enable long-term reductions in unemployment and poverty. These challenges include: declining competitiveness (particularly for cheap labour products where Indonesia competes with China and India); labour skills; financial system reform; anti-corruption efforts; tax system reform; legal system and governance reform; the risk of further serious security incidents; and the need for significant infrastructure investment.

Bilateral relationship

Australia-Indonesia Relations

Australia and Indonesia are close neighbours enjoying a wide-ranging relationship encompassing political, security, commercial, cultural and people-to-people links. Over 15,000 Indonesian students were enrolled to study in Australia in 2006. Around 400 Australian firms are operating in Indonesia. Two-way trade between Australia and Indonesia was valued at $10.4 billion in 2006-07, making Indonesia our 13^th largest trading partner.

Australia and Indonesia have important programs of cooperation on a wide range of international issues including counter-terrorism, illegal fishing, people smuggling, avian influenza, climate change and interfaith dialogue.

In July 2007, Australia and Indonesia agreed to commence a feasibility study to examine the merits of a bilateral free trade agreement, expected to be completed by mid-2008.

The 7 ^th Australia-Indonesia Trade Ministers’ Meeting, held in Jakarta on 25 June 2007, focused on progress made under the Australia-Indonesia Trade and Investment Framework (TIF) signed in 2005. Leading Australian and Indonesian business representatives took part in the second Policy Dialogue, discussing practical issues relating to the bilateral investment climate. An Experts’ Group established under the TIF provided recommendations to ministers on ways to broaden the commercial relationship.

A Joint Declaration on Comprehensive Partnership between Australia and the Republic of Indonesia was signed during President Yudhoyono’s visit to Australia (3-6 April 2005). The 8^th Australia-Indonesia Ministerial Forum was held in Bali on 29 June 2006 (see the text of the Joint Statement) and was attended by five Australian and eleven Indonesian ministers. The Forum, established in 1992, provides an important platform for the expansion of bilateral ties between the two countries. Representatives of the Australian and Indonesian business communities also held a dialogue with ministers at the Forum.

Development assistance

Australia is committed to providing ongoing assistance for Indonesia’s economic and social development. Australia will provide an estimated $458 million in official development assistance (ODA) to Indonesia in 2007-08 – a 33 per cent increase on the $344 million in 2006-07. Indonesia is the largest recipient of Australian ODA. Australia’s development assistance focuses on economic management, institutions of democracy, security and stability and basic social services, and support for Indonesia’s reconstruction and development efforts, both in and beyond tsunami-affected areas, through sustained cooperation focused on the Indonesian Government’s programs of reform.

The quick Australian response to the 26 December 2004 earthquake and tsunami disaster in Aceh clearly demonstrated the depth and importance of the bilateral relationship. Australia also responded quickly to the earthquake which struck the Yogyakarta region of Java on 27 May 2006 and to the floods that affected Jakarta in February 2007 (see AusAID website for further information).

In January 2005, leaders announced the formation of the Australia-Indonesia Partnership for Reconstruction and Development (AIPRD) under which Australia will contribute $1 billion over five years towards reconstruction and development in Aceh and elsewhere in Indonesia. All funds have now been allocated to projects.

Australia is providing almost $24 million over three years for a package of training and technical assistance to Indonesia to support its efforts to address significant transport safety challenges.

Australia has also made a $100 million commitment over an eight year period to assist Indonesia in helping to combat HIV under the Australia-Indonesia Partnership for HIV.

For further information on Australia’s development assistance program to Indonesia, visit the AusAID website AusAID in Indonesia.

Cooperation on Climate Change

Australia is providing Indonesia with assistance to reduce greenhouse gas emissions from deforestation and promote sustainable forest management. Australia will contribute up to $30 million under the Kalimantan Forests and Climate Partnership, which aims to raise up to $100 million over four years by working with other countries, international non-government organisations and the private sector. The Partnership aims to preserve 70,000 hectares of peat land forests in Indonesia’s Kalimantan region, re-flood 200,000 hectares of dried peat land and plant up to100 million new trees on rehabilitated peat land for conservation purposes. Australia’s contribution is in addition to the $10 million announced in July 2007 to assist Indonesia to reduce deforestation, improve forest monitoring and prevent peat land fires.

Cooperation on Counter-Terrorism

Australia and Indonesia have a strong commitment to mutually-beneficial engagement and cooperation to combat terrorism. Indonesia also benefits from Australia’s CT assistance programs provided on a regional basis.

Australian and Indonesian authorities have cooperated closely to investigate several terrorist incidents, including the 12 October 2002 Bali bombing, the 9 September 2004 bombing outside the Australian Embassy in Jakarta and a second Bali bombing on 1 October 2005. Indonesian authorities have successfully brought to justice more than 180 terrorists and their accomplices.

Building on the links established through these joint investigations, cooperation now also includes wide-ranging capacity-building assistance to Indonesian agencies, including in the areas of law enforcement, counter-terrorist financing, border control, transport security and intelligence. An example of capacity building assistance is the jointly established Jakarta Centre for Law Enforcement Cooperation (JCLEC) to which Australia will contribute $36.8 million over five years (2004-2009).

Australia and Indonesia have also taken the lead in promoting regional counter-terrorism cooperation, including by jointly hosting the Sub-Regional Ministerial Conference on Counter-Terrorism in Jakarta in March 2007. That meeting provided impetus for closer regional counter-terrorism cooperation and led to agreement on priorities for future CT action in South-East Asia.

In February 2002, Australia signed a non-legally binding bilateral counter-terrorism memorandum of understanding (CT MOU) with Indonesia. The CT MOU has been renewed annually since 2002. Underlining the long-term nature of our bilateral counter-terrorism cooperation with Indonesia, on 7 February 2008 we extended the CT MOU for a further three years. This extension reflects the strengthening and deepening of security cooperation between Indonesia and Australia envisaged under the Lombok Treaty.

Lombok Treaty

The Agreement between Australia and the Republic of Indonesia on the Framework for Security Cooperation (Lombok Treaty) was signed by Foreign Ministers in Lombok on 13 November 2006. On 7 February 2008, Australian Foreign Minister Stephen Smith and Indonesian Foreign Minister Dr Hassan Wirajuda exchanged notes, bringing the treaty into force.

The Agreement is forward-looking and aims to deepen and expand bilateral cooperation and exchanges on matters affecting our common security in a modern context. It provides a strong legal framework for encouraging intensive dialogue, exchanges and implementation of cooperative activities to combat terrorism and transnational crime, in the areas of defence, law enforcement, counter-terrorism, intelligence, maritime and aviation security, and in relation to the proliferation of weapons of mass destruction, and emergency management and response.

The Agreement also provides a firm basis for the conclusion of separate arrangements in specific areas. Existing and future Memoranda of Understanding (MoUs) on such issues as counter-terrorism, defence cooperation and police cooperation will operate within the overarching framework of the treaty-level Agreement and be guided by the principles enunciated within. It contains a clear undertaking of support for each other’s territorial integrity.

The Agreement should set a benchmark for others in the region and will contribute to the stability and prosperity of both countries and the broader Asia-Pacific region.

Interfaith Dialogues

On 6-7 December 2004, Australia co-hosted with Indonesia a regional Interfaith Dialogue which aimed to help empower moderate religious leaders and underpin the key role of faith and community leaders in bridging differences and building harmony in the South-East Asia region. This was the first joint Australia-Indonesia Government organised event of this type.

The Philippines and New Zealand joined Australia and Indonesia in co-sponsoring the second Interfaith Dialogue at Cebu in the Philippines from 14-16 March 2006 which adopted the ‘Cebu Declaration on Regional Interfaith Cooperation for Peace, Development and Human Dignity’. The third Interfaith Dialogue was hosted by New Zealand on 28-29 May 2007 in Waitangi. The next regional Interfaith Dialogue will be held in Cambodia in 2008.

Cooperation on Avian Influenza

In December 2006, Australia announced an additional $18.5 million over four years to help Indonesia fight avian influenza. Indonesia has been the country hardest hit by the disease, with around 80 per cent of the approximately 110 cases confirmed by the World Health Organisation. Australia’s program will target three priority areas: control of the disease in animals, improved community awareness and strengthened surveillance of the disease in humans and animals. This brings Australia’s total commitment to Indonesia’s avian influenza response to $34 million. The $15.5 million already committed to Indonesia since 2004 has funded the training of lab staff in the diagnosis of the virus; supported rapid response teams to investigate all suspected human cases and associated animal outbreaks; and supplied 50,000 courses of the anti-viral medication Tamiflu to raise Indonesia’s buffer stocks.

Cooperation on People Smuggling

In February 2002 and again in April 2003, two regional ministerial conferences on people smuggling and trafficking were hosted by Australia and Indonesia, leading to the establishment of the Bali Process on People Smuggling, Trafficking in Persons and Related Transnational Crime. The ongoing work of the Bali Process is a collaborative effort participated in by over 50 countries and numerous international agencies. Current activities are focused on delivering direct practical benefits to operational agencies. Activities on the forward agenda include proposed workshops on combating people smuggling, document examination at the border, and immigration aspects of border security.

Cooperation on Illegal Fishing

Australia and Indonesia are working closely to tackle the problem of illegal fishing in Australia’s northern waters and more broadly in the region. Illegal fishing is highly damaging to Australia’s marine environment, and also poses significant quarantine, immigration and security risks to Australia.

A public information campaign to discourage fishers and their communities from participating in illegal fishing activity in Australian waters commenced formally in September 2006. Australia and Indonesia are undertaking a joint study of illegal fishing in the Timor and Arafura Seas to better understand the nature and extent of the problem. Australian and Indonesian officials have held the first meetings of a joint fisheries surveillance forum and a working group to manage shared red snapper stocks. Australia is supporting the development of alternative livelihoods for illegal fishers in eastern Indonesia.

In 2006-07, Australia committed an additional $389 million over four years to combat illegal fishing in Australia’s northern waters. The bulk of this funding will be used to increase enforcement activity.

The Australia-Indonesia Institute

The Australia-Indonesia Institute was established by the Australian Government in 1989. It aims to develop relations between Australia and Indonesia by promoting greater mutual understanding and expanding areas of contact and exchange between our two peoples. For more information visit: Australia-Indonesia Institute.

Bilateral economic and trade relationship

Bilateral Trade Relationship

Indonesia is Australia’s 13^th largest trading partner - our 10^th largest export market and 13^th largest source of imports. In 2006-07 total two-way merchandise trade between Australia and Indonesia totaled almost $9 billion. Two-way services trade reached almost $1.5 billion in 2006-07.

Australia’s main exports are wheat, crude petroleum, travel services, aluminium, live animals and cotton. Major imports from Indonesia are crude petroleum, non-monetary gold, travel services, paper and paper products and simply worked wood.

*Major Australian exports, 2006-07**	$m
Crude petroleum	644
Travel services	652
Aluminium	328
Live animals	304
Cotton	211

*Includes $1bn of confidential items, mainly wheat & sugar, 25% of total exports.

Major Australian imports, 2006-07	$m
Crude petroleum	1,780
Pumps for gas	514
Non-monetary gold	215
Travel services	357
Wood, simply worked	151

According to the Australian Bureau of Statistics, Australian investment in Indonesia totaled $3.1 billion in 2006. Indonesian investment in Australia was $487 million in 2006. An estimated 400 Australian companies are represented in Indonesia in a range of sectors, including the mining, construction, finance and banking, food and beverage, and transport sectors.

Trade and Economic Cooperation

In addition to the Australia-Indonesia Ministerial Forum, the annual Australia-Indonesia Trade Ministers’ Meeting promotes trade and investment between the two countries and addresses impediments through dialogue at many levels. In June 2007, Indonesia hosted the 7^th Trade Ministers’ Meeting in Jakarta. The major focus was on reviewing progress under the Trade and Investment Framework (TIF) signed on 29 September 2005. The TIF is designed to strengthen bilateral commercial ties by enhancing business opportunities and improving facilitation of trade in goods, services and investment. The TIF represents a key step forward in implementing the Joint Declaration for a Comprehensive Partnership signed in April 2005.

In July 2007, Australia and Indonesia agreed to commence a feasibility study to examine the merits of a bilateral free trade agreement between Australia and Indonesia.

Bilateral commercial links are also advanced through the Australian-based Australia-Indonesia Business Council and its counterpart in Indonesia, the Indonesia-Australia Business Council.

Australian Trade and Investment Strategies

Australia is encouraging Indonesia to maintain liberalised trade and investment regimes. The Australian Government takes every opportunity to seek reductions in tariffs and remedies for non-tariff barriers affecting Australian exports, bilaterally and through multilateral and regional trade forums.

The Australian Government is currently pursuing a number of market access issues with Indonesia, including tariff and quarantine issues related to horticulture products and recent changes to Indonesia’s meat import regulations. The Australian Government has requested that Indonesia remove the tariffs on horticulture products which were increased on 1 January 2005 as part of Indonesia’s broader tariff harmonisation process.

Export opportunities

Trade and Investment Opportunities

Indonesia continues to offer export potential for a range of Australian companies. Merchandise exports to Indonesia increased by 6.5 per cent in 2006-07 from the previous year. Austrade estimates that over 400 Australian companies currently operate in Indonesia.

Australia is working with Indonesia within the Cairns Group of Agricultural Fair Traders to increase liberalisation in international trade in agricultural products during the current round of WTO negotiations.

The Indonesian Public and Private Sector Partnership for Infrastructure Development Summit was held in Jakarta on 17-18 January 2005. The second Infrastructure Conference and Exhibition was held on 1-3 November 2006 and attended by a number of Australian companies.

TradeWatch Contacts

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