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Saudi-Indonesian ties set to strengthen

Saudi Arabia’s King Salman this week arrived in Indonesia accompanied by a large contingent of high-ranking officials and business people, which reflects the importance attached by Riyadh to developing relations with Jakarta.

Indonesia is the world’s largest Muslim-majority state and the fourth most populous country in the world. International Monetary Fund (IMF) data indicate that Indonesia boasts the largest economy in the Association of Southeast Asian Nations (ASEAN), and the 16th largest worldwide. In this context, it is vital for the Kingdom to cultivate strategic relations with this future rising economic power.

Saudi Arabia has been Indonesia’s largest global supplier of crude oil and its biggest trading partner in the Arab world, Middle East and North Africa (MENA). Two-way trade decreased to $4.1 billion in 2016, as the decline in global oil prices hit trade between Saudi Arabia and Indonesia very hard. The volume between the two countries dropped significantly last year by almost 26 percent from 2015 and by over 53.2 from 2014. 

Indonesia’s main exports to Saudi Arabia include cars, palm oil, tuna, rubber products, plywood, paper products, pulp, charcoal and textile products; the Kingdom’s top exports are mainly oil products and petrochemicals. Looking forward, Indonesia and Saudi Arabia are pushing to triple or quadruple their bilateral trade value by 2020 as the two countries believe they have a lot of potential for expansion.

Potential investments

Indonesia continues to implement measures to open up its economy and attract more investment and foreign companies. Foreign direct investment (FDI) continues to flow into Indonesia although volumes have decreased by over 29 percent year-on-year to $15.51 billion in 2015, according the latest data from the UN Conference on Trade and Development (UNCTAD).

Saudi Arabia’s investment in Indonesia is still low, but could increase significantly after the visit of the Saudi king. Based on data from Indonesia’s Investment Coordinating Board, Saudi Arabia only invested $900,000 in Indonesia last year, hence being ranked 57th in terms of the biggest foreign investors. Saudi investment between 2010 to 2015 totalled only $34 million, or 0.02 percent of total FDI in the period. However, during King Salman’s visit, Saudi Arabia pledged $1 billion in development finance for Indonesia, while the Indonesian government hoped the visit would bring Saudi investments of up to $25 billion.

However, Fitch rating agency noted in a recent report that structural reform since September 2015 has also put Indonesia on solid footing when it comes to its growth outlook in the medium term. Indeed, Indonesia’s growing role as a manufacturing hub became more attractive to foreign investors particularly with its huge, fast-urbanizing domestic market and a rising middle class. The country’s domestic financial market is also well developed, providing opportunities for investment whilst Islamic banking will add another dimension for investors, particularly those from Saudi Arabia. Indonesia has the second biggest Islamic finance industry in Asia in terms of asset size, next to Malaysia. Additionally, Indonesia continues to suffer from a sizable infrastructure deficit and this leaves significant potential for the sector to attract investors in future. Above all, Indonesia’s membership of the ASEAN free trade agreement will lower tariff and non-tariff trade barriers with the country’s neighbors.

Though trade between the countries fell during the oil-price crash, there are signs of closer economic relations between Riyadh and Jakarta going forward.

DR. Naser Al-Tamimi

Yet investors in Indonesia face a variety of challenges that hinder the business environment in the country. Chief among these risks are the resource nationalism policies and restrictions on FDI; high levels of bureaucracy and legal risk; corruption; inefficient state-owned enterprises; an inflexible labor market; and threats to foreign workers and businesses from crime and terrorism. The IMF noted in a recent report that “unlocking Indonesia’s full economic potential will require policy reform success — particularly in the areas of bureaucratic efficiency, corruption and investment promotion — and progress on this front could take place at a slow-to-moderate pace.”

Oil interdependence

A recent analysis by the International Energy Agency (IEA) stated that Indonesia’s oil sector is characterised by declining production. Since it peaked at 1.7 million barrels per day (mbpd) in 1991, oil production has been declining steadily, and the current levels, at 0.8 mbpd in 2016, covers only about half of the Indonesia’s oil demand. IEA’s New Policies Scenario forecasts Indonesia’s oil production to remain flat at around 0.8 mbpd in the medium term to 2020, and decline over the long term to reach 0.5 mbpd.

Thus, Indonesia will remain a net importer of both crude oil and refined fuels over the next two decades. The country currently relies on fuel imports for about 52 percent of its annual needs and this percentage is expected to increase to 61 percent by the end of the decade. In this context, the $6 billion agreement signed between Saudi Aramco and Indonesia’s Pertamina seems very logical and will strengthen the presence of the Saudi company in the promising Indonesian market and wider ASEAN region. Aramco, which currently supplies the Cilacap refinery with 120,000-125,000 barrels per day (bpd), could increase the supply to up to 270,000-300,000 bpd after an upgrade is completed. 

The next economic giant

The IMF expects Indonesia’s growth to rise modestly to 5.1 percent in 2017, with the country’s gross domestic product (GDP) hitting over a trillion dollars by the end of the year, for the first time in Indonesian history. Indonesia is also expected to post impressive real GDP growth over the medium term, with the forecast annual average real growth rate coming in at 5-6 percent between 2017 and 2021. Importantly, Indonesia’s growth outlook remains positive over the long term, supported by the country’s large domestic consumption base, favorable demographics and a gradual improvement in exports and business environment. BMI Research forecasts real GDP growth to average at 6 percent over the next decade.

Consequently, Indonesia is projected to rank among the global top 10 economies in market exchange rate terms by 2030, according to London-based Center for Economics and Business Research. Indonesia’s positive economic outlook is however challenged by global uncertainties, including those around policies from the Trump administration, the possible impact from China’s economic slowdown, and potential domestic political polarization, which could slow the economic reforms.

• Dr. Naser Al-Tamimi is a UK-based Middle East researcher, political analyst and commentator with interests in energy politics and Gulf-Asia relations. Al-Tamimi is author of the book “China-Saudi Arabia Relations, 1990-2012: Marriage of Convenience or Strategic Alliance?” He can be reached on Twitter @nasertamimi and e-mail: [email protected]