A win-win partnership with Germany

Germany and Indonesia celebrate 60 years of friendship and strengthen ties between their complementary markets.

Since diplomatic relations were first formed in 1952, Indonesia and Germany have maintained strong ties through both good and turbulent times. Germany illustrated its long-term commitment to Indonesia by standing alongside it throughout the Asian Financial Crisis. While many companies left the area in a mass exodus driven by speculation and fear, German firms, with only a few exceptions, remained true to the Indonesian market. 

This solidarity proved prudent. As the Eurozone falters under the weight of domino banking crises, Indonesia’s financial system has remained robust, rewarding the responsible long-term investor who has learnt the harsh lesson that fast money gained is usually not earned. The story underpinning this 60th anniversary is therefore one of two nations, both regional leaders in an important moment of transition. 

Indonesia’s prudent financial stewardship since the 1997-98 crisis is now being rewarded. Called the ‘best performing emerging market’ in 2011, Indonesia has regained its ‘investment grade’ status from Fitch and Moody, some 14 years after it was removed. 

Indonesia’s economic success (the archipelagic nation recorded a GDP growth rate of 6.5% in 2011) and stability come from the fact that it defied the conventional recipe for ‘development’ and focused predominately on the huge potential within its own population. As a result, domestic consumption comprises the bulk of GDP with exports only accounting for 26% – despite being endowed with incredible forestry, mineral, agricultural and arguably any other type of natural resource currently in demand on the international market. 

“Our growth is powered by our home market with 70% of GDP coming from domestic consumption,” explained Sofjan Wanandi, Chairman of the Indonesian Employers Association (APINDO). Additionally, the republic has an export-to-GDP ratio of 25% – second only to India within the region – and a debt-to-GDP ratio of approximately 26%. Compare the second figure to 85.7% in the UK or 165% in Greece and one can better comprehend Indonesia’s relative immunity to international financial forces.

However, Indonesia has witnessed the ‘effects’ of the global economic downturn to some extent this year. Foreign investors – who own a majority of free-floating shares on the Indonesian Stock Exchange – sold a net 4.9 trillion rupiah between January and June, pushing the Jakarta Composite Index into an overall decline this year despite reaching an all-time high of 4224 on May 3. 

Edgar Ekaputra of Bank Danareksa puts this down to speculation and a lack of investor knowledge with regards to Indonesia. “We are still penalised by foreign countries, because we are the least understood country. But look at foreign exchange reserves – we have 150 billion – this is the highest in 30 years. Consider inflation – it stands at approximately 5.5% – this is the lowest in 30 years. You don’t have to sell BMWs to succeed here, just sell soap. When you sell anything to 240 million people, the multiplier effect is immense,” he said.

With 50% of the population below the age of 29, and 9.3% aged above 55, 65% of the population base is ‘productive’. This, coupled with an unemployment rate as low as 6.5% in 2012, ensures that income outpaces consumption. Add in the low-cost lending environment encouraged by Bank Indonesia (the country’s central bank) and you have the emergence of an impressive consumer class.
With rising consumer spending, investment has followed, challenging the ‘liberalisation-first’ approach advocated by most economic development pundits. “Indonesia has all the resources that the world needs and is now placing greater emphasis on value addition which will trigger huge investments, if done the right way. The inflow of investment is constantly growing, foreign investment was at $20 billion last year,” explained Jan Ronnfeld, Managing Director of the German-Indonesian Chamber of Commerce (EKONID). 

Such wealth is, however, concentrated in the islands of Java and Sumatra. Undergoing democratisation and decentralisation simultaneously upon the downfall of the Suharto regime in 1998, the country has significant work to do to improve the level of coordination that occurs between government bodies, as well as between the government and the private sector. 

“We are dealing with a scenario in which government entities are unavoidably clashing whilst attempting to deliver public services within a blossoming democratic framework,” justified Professor Kuntoro Mangkusubroto, who heads the presidential task force UKP4 assigned to improving Indonesia’s investment climate. 

However, the introduction of President Susilo Bambang Yudhoyono’s ‘Master Plan for the Acceleration and Expansion of Indonesia’ (MP3EI) and the subsequent establishment of ‘six economic corridors’ – assigning specific roles to each of the six geographical clusters – has arguably had a noticeable impact. Investments outside of Java reached 33.6 trillion rupiah (EUR 2.9 billion) in the first quarter of 2012, which represented 47% of total investment realisation during that period.

Historically an economy based on cheap labour and the export revenue generated from raw materials, Indonesia’s two greatest challenges are to accelerate the expansion of its manufacturing sector whilst simultaneously investing in the development of innovative and creative human capital. The government is ensuring more value addition occurs at home by placing bans on the export of many unprocessed commodities. While an export ban of any kind will always be frowned upon by the dominant ‘free trade’ discourse, Ilham Habibie, Chairman of the German Alumni Association, reminds us that initiatives such as these are about creating more long-term, quality jobs.

With this goal in mind Indonesia is now aiming to attract investment and trade with partners that will help bolster its industrial base – and spur innovation among SMEs. Germany is an obvious partner to help accelerate this process of value-added industrialisation and enterprise. “We are developing our SMEs as well as our industrial sector. With Germany we share a strategic partnership on how to deal with joint productions,” says Eddy Pratomo, the Indonesian Ambassador to Germany. 

 

The Director General for National Export Development within the Indonesian Ministry of Trade, Gusmardi Bustami explained that in order to be involved in the whole production process Indonesia needs more advanced technologies. “With the products we buy from Germany, we can manufacture more products here and sell more value-added goods,” he says. 

However, while German technology still maintains a strong reputation, Germany is now facing increasing competition from countries such as Japan, Korea and China who provide substitutes at lower prices. The Director General for International Industrial Cooperation within the Ministry of Industry, Agus Tjahajana Wirakusumah, elaborated on this phenomenon. “Ten to 15 years ago when you built a manufacturing plant all the machinery was German. However, nowadays the Indonesian entrepreneur is mixing and matching technologies to give cost-saving solutions.” 

The height of German-Indonesian political and economic relations came at the end of the 1990s when the German-educated Bacharuddin Jusuf Habibie became president. Despite holding office for only one year, president Habibie helped usher in a new era of representative government following three decades of authoritarian rule under President Suharto. Under Habibie’s leadership, educational exchange, economic cooperation and political relations with Germany were all prioritized, but over time the relationship began to dwindle.

In the past couple of years however, these strong ties are returning as each nation identifies the other as a strategic partner, as illustrated by Chancellor Merkel’s visit to Indonesia in July. Celebrating the 60th anniversary of diplomatic relations, Germany and Indonesia have committed to strengthening their cooperation in five key areas: trade, education, health, research & technology and defence. Merkel and Yudhoyono also pledged collaboration in the energy sector; namely, to raise Indonesia’s share of renewable energies to 25% by 2015. 

An increase in bi-lateral trade between Indonesia and Germany is particularly attractive as each market complements the other perfectly, with Indonesia supplying Germany with agricultural products, textiles, electronic devices, footwear and ores, while importing machinery, chemical products, communication technologies, motor vehicles and pharmaceutical products. “I think that what is unique about doing business with Europe, as opposed to Asian countries, is that we are complementary. What we have, they don’t have. And what they have, we have not. We need one another so to speak,” explained the Chairman of the Indonesian Chamber of Commerce (KADIN), Suryo Sulisto. 

This mutually beneficial relationship has prompted an increase in trade, with the total volume of exchange between the two nations growing by approximately 12% – to EUR 6.7 billion – in 2011. While German exports to Indonesia increased by 12% to EUR 3.4 billion, German imports from Indonesia reached EUR 3.3 billion, a year-on-year growth of 9.7%. These figures should only increase in the coming year, as the Indonesian government has prioritised the establishment of a Comprehensive Economic Partnership Agreement (CEPA) that will help German products gain an additional advantage against their Asian competitors. Jakob Sorensen, Chairman of the European Chamber of Commerce in Indonesia, said that he is excited to see how CEPA is able to bring more European investment into Indonesia as it will lead to capacity building, the transfer of know-how and job creation.  

With ASEAN integration planned for 2015, Germany’s strengthened ties with Indonesia will be vital to ensure fruitful cooperation between the EU and ASEAN. “Germany and Indonesia are not two lonely stars, but are connected with large and dynamic regions. The implications of what we do together – economically, politically and culturally – can and should have an impact on cooperation between Europe and ASEAN as well,” said Dr Norbert Baas, the German Ambassador to the Republic of Indonesia and Timor-Leste. 

Of like mind is Chancellor Merkel, who said during her July visit: “I am deeply convinced that Europe has to hurry up in setting up a free trade agreement with this region if it wants to be able to compete.”

Thus, as Germany starts to recognise the growing power of Asia, it would be well-served to look beyond the lure of China, and towards Indonesia. “When you think of Indonesia, think beyond natural resources, and think beyond exporting goods and services to Indonesia. Indonesia should be seen as part of an enlarged ASEAN strategy,” recommends Ilham Habibie. 

As the world strives to find a sustainable path for development – financially, environmentally and socially – strategic partnerships such as that being formed between Indonesia and Germany will be vital to ensuring that lessons learnt and knowledge gained can be shared, so as to maximise the benefits and minimise the risks of global interconnection. This moment of celebration of 60 years of bi-lateral relations therefore serves as a reminder to us all that moments of crisis are, and have always been, opportunities for transformation.