Global Business Guide Indonesia

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Business Updates | The US Presidential Elections and What it Means for Indonesia

On 9th November 2016, the world awoke to the surprise victory of Mr Donald Trump and the news that he will become the 45th President of the United States of America. For Indonesia, the election triggered market sell-offs in bonds and currency which resulted in the rupiah falling by more than 2.6% against the US dollar — forcing the Indonesian central bank to step in — while the Jakarta Composite Index closed 4% down, with the mining sector, infrastructure, and miscellaneous industry subject to the sharpest drops (The Jakarta Post). As the vote counts rolled in and it became clear Trump was heading for the White House, US and global stock markets plunged before rebounding as investors began to brace for President-elect Trump’s potential protectionist agenda. Despite Indonesia not being a major trading partner with the US, the spiking of the US dollar has caused a ‘knee-jerk’ reaction in the market as Indonesia has a high percentage of foreign ownership of its sovereign bonds; this is a further cause of unease at a time when Indonesia is courting investors to stimulate its economy.

A tumbling rupiah

The weakening of the rupiah after the US elections highlights Indonesia’s place among the ‘Fragile Five’ economies that are susceptible to US dollar sell-offs (See Indonesia’s Fragility & The Fed). President-elect Trump’s plans to implement protectionist policies such as raising tariffs against imports has caused concern among US manufacturing firms as the fallout could be an increased cost to US-based manufacturers due to globalised supply chains. The new economic policies therefore have the potential to ignite inflation, and such pressures could force the US Federal Reserve to begin raising interest rates by December 2016. As a result, a stronger dollar would arise which could lead to a more volatile rupiah. Furthermore, this would place further stress on Indonesia’s current account deficit with many companies in the private sector serving dollar dominated debt and could also result in a scramble for the US dollar in order to pay such debts earlier. 

The stability of the rupiah will be Bank Indonesia’s priority amidst the current short-term volatility so as to counter persistent uncertainty in global markets off the back of the US presidential elections. The Indonesian government’s policies are aimed at achieving this stability by maintaining investor confidence in Indonesian bonds as well as encourage greater investment from the private sector.

Looking to the future

It is however, through the integral pillars of the Indonesian economy such as trade and Foreign Direct Investment (FDI) that Indonesia has to be observed closely in anticipation of potential US protectionist trade policies. Indonesian exports to the US reached $16 billion USD in 2015, with the economic relationship between the two countries set to reach $131 billion USD by 2019. Indonesia’s main exports include rubber, apparel, fish products, coffee, wood, and cocoa among others; such products are predominantly not produced in the US domestically. This showcases a competitive advantage to which Indonesia should capitalise upon should trade pacts be renegotiated with Trump’s administration.

Furthermore, with President-elect Trump’s plans to impose tariffs on imported goods, countries with existing bilateral trade agreements (BTA) with the United States like Vietnam could suffer major setbacks — the BTA has given Vietnam preferential access to US markets — with textiles being the major export from Vietnam. Moreover, such tariffs would give rise to the prospect of weakened demand for Chinese products within US-based manufacturing and this would exacerbate an already weak demand for Chinese products in Indonesia and vice versa (See What China’s Slowdown Means for Indonesia: A Trade Perspective). As such, this provides an opportunity for Indonesian manufacturers to gain a competitive edge over its main regional rival. 

The possibility of disrupted global trade patterns should push the Indonesian government to accelerate and implement on going trade agreements. By and large, intra-ASEAN trade has yet to reach its full potential, with trade between ASEAN countries accounting for only 24% of total trade within ASEAN nations (Bloomberg) (See Indonesia and the ASEAN Economic Community – Ready for Regional Integration?). This holds room for growth for Indonesian exports to ASEAN members, as the country’s local businesses have yet to take full advantage of the opportunities within ASEAN and the ASEAN Economic Community. With President-elect Trump publicising his desire to dismiss the Trans-Pacific Partnership (See Indonesia and the Trans-Pacific Partnership – Worth the Membership?), Indonesia must look to solidify its trade partnerships. A positive step has been taken by Indonesia’s Trade Ministry who aims to implement the Comprehensive Economic Partnership Agreement with the European Union (See Indonesia and the EU CEPA – Deal or No Deal?). Bilateral trade between the EU and Indonesia amounted to €25 billion euros in 2015; this would enable Indonesia to compete more effectively with Vietnam and Malaysia. Furthermore, Indonesia will hopefully be prompted to push ahead in correcting its own protectionist policies which should be of interest to investors as the country hopes to reap the benefits of greater regional openness.

In spite of current global economic conditions, FDI in Indonesia is not mirroring this trend and has remained solid (See FDI Growth in Indonesia: A Timely Reminder of Long-term Upside). The Indonesian Investment Coordinating Board remains committed to its investment target of $44 billion USD in 2016 and $47 billion USD in 2017, with the manufacturing sector accounting for the largest source of inbound FDI. Indonesia’s economic growth, political stability, and large domestic consumption, coupled with a weakened rupiah, make the country an attractive destination for FDI; this would enable investors from countries such as China to accelerate and develop existing growth avenues in Indonesia. With President-elect Trump’s administration preparing to increase infrastructure spending in the US, shares of Indonesian miners rose by 21% (Bloomberg) with nickel among the metals that will benefit from more infrastructure building in the US. Indonesia and President Joko Widodo must make good on the proposed reforms to reduce bureaucracy if it is to capitalise on these more open opportunities.

The recent US elections have caused great uncertainty in the global markets and have raised questions about the credibility of so-called safe haven markets. As evident from the Brexit outcome, and the rise of populist parties across Europe, these low-risk markets have now reached the status of medium-risk, which could shift investors to more high-risk emerging markets like Indonesia. The implementation of economic reforms as well as the cutting of red tape needs to be accelerated in order to make Indonesia’s investment climate more attractive. Through this, Indonesia can fully unleash the full potential of its domestic market as well as trade relationships in order to bolster its position in an era of increasing uncertainty and risk.

Global Business Guide Indonesia - 30th November 2016

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Indonesia Snapshot

Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)