Indonesia intends to negotiate a free trade deal with Britain once it exits the EU, the country’s former Trade Minister Thomas Lembong has said.
Mr Lembong, who is one of Indonesian President Joko Widodo’s (Jokowi’s) key economic policy advisors, told Asia House in an interview that he met UK Minister of State for Trade Policy Lord Price after the recent EU Referendum to discuss a free trade agreement (FTA). At the time he was Indonesia’s Trade Minister but following a Cabinet reshuffle in July he was appointed as chairman of the Indonesia Investment Coordinating Board (BKPM).
He discussed the FTA with Lord Price shortly after Lord Price was appointed Minister of State at the new Department for International Trade – created after British Prime Minister Theresa May took office. The Trade Policy Unit, which Lord Price now leads, has a wide range of functions that include FTAs and the UK’s dealings with the World Trade Organisation (WTO).
“One thing which conceptually we agreed upon when I was Trade Minister is that we shall continue to complete our trade agreement with the EU and simply model Britain’s one on the FTA that we have with the EU,” Mr Lembong said.
But he said: “The UK will have to offer better terms to Indonesia than the EU as the EU will bring in 27 member states. Indonesia will have to make more concessions for a big trophy like the EU than for a country like Australia.”
Indonesia is hoping to seal an FTA with Australia in 2017. In a public speech at Asia House Australian Trade Minister Steven Ciobo said that a FTA with Indonesia was Australia’s top priority because of the country’s 250m population, expanding middle class and geographical proximity.
Bilateral trade between the UK and Indonesia is worth US$2.3 billion, 0.9 per cent of Indonesia’ total exports and Indonesia has a modest trade surplus.
Total trade between Indonesia and the EU, on the other hand, reached US$26.1 billion in 2015.
The EU is Indonesia’s fourth largest trading partner with agricultural products a key export.
Indonesia’s non-oil exports to the EU represent about 11 per cent of total non-oil exports, making it the second-largest export destination for Indonesia after the US.
Exports to the EU include machinery, appliances, textiles, footwear, plastic and rubber.
Indonesia-EU talks on a Comprehensive Economic Partnership Agreement (CEPA) had stalled in 2013 but resumed in October 2015. Official negotiations began immediately after the Brexit vote in July.
But Mr Lembong said he thought the EU deal would take longer than two years to complete.
“A lot has happened since then in Europe and in Indonesia, so I would not be alarmed if it does take longer. I think even 2018 is a stretch,” he said.
‘Brexit is a wake-up call to ASEAN’
As for the impact of Brexit on Indonesia, Mr Lembong was forthright in his views, describing the EU referendum result as a “wake-up call for ASEAN.”
“I would be more worried about the impact of Brexit on the EU than its impact on Britain. I think Britain will emerge just fine, but I assume this will be a big wake-up call to the EU and I hope a wake-up call to ASEAN as well.
“Transnational unions cannot be allowed to become a project of the elites. Brexit is a wake-up call for politicians and business elites that they are losing the public trust. I ascribe that to a failure of communication,” he said.
“We are failing to bring along our own people on the benefits of globalisation and international trade, even of international finance,” he added.
Mr Lembong, who has a background in private equity, took up his new role in July after Jokowi’s second Cabinet reshuffle when former Real Estate Indonesia (REI) chairman Enggartiasto Lukita was appointed the new Trade Minister.
Commenting on the Cabinet reshuffle, Mr Lembong said: “I have to admit politics played a bit of a role.”
By allowing two more political parties to join the ruling coalition, the Great Indonesia Coalition (KIH), President Jokowi ensured that number of seats his ruling coalition has in the House of Representatives (DPR) went up from around 43 per cent to 69 per cent (386 seats out of 560 seats), Mr Lembong said.
Jokowi’s new political allies Golkar and PAN were rewarded with Cabinet seats, he explained.
He described the new Cabinet as an “upgrade” and an “improvement” on the previous Cabinet ministers. He said it was a result of “performance and politics competing”.
“Teamwork has improved and there is more of a team spirit,” he added.
Lembong visited Asia House during a trip to London to meet potential investors. Indonesia is poised to see GDP growth of 5.2 per cent in 2016. Jokowi has promised to accelerate growth to seven per cent.
London is still the centre of international finance in Mr Lembong’s eyes, despite fears among some it could lose that status post-Brexit.
“London is a very efficient way to talk to a lot of sectors from the investing community from Wall Street to the City,” the former investment banker, who was educated at Harvard, said.
During his trip he gave a seminar to foreign investors and met with banks and financial institutions. “I can’t say which bank but one of the banks wants us to do some financial engineering to facilitate capital flows to Indonesia for example by issuing infrastructure bonds offshore,” he explained.
Public investment and structural reforms to deregulate the economy and attract private investment have been a key hallmark of Jokowi’s administration.
The Widodo administration has, in the past year, announced 12 economic policy packages covering 203 business regulations to stimulate economic growth.
Mr Lembong said the impact could already be seen as FDI was up 12 to 14 per cent this year compared to last year “in Rupiah, in nominal terms.”
“I am optimistic that we are one of the few major economies where growth could be poised to accelerate, unlike India and the Philippines that are already posting high growth rates but may have peaked. It is hard to sustain growth rates of seven or eight per cent, whereas we are still punching very much below our weight. With the economic reforms we have had, I think there is scope for a gradual lift,” he said.
He is one of the economic policy advisors working on the next phase of reforms in Indonesia. He said he was not in a position to reveal what they were but he said: “I can indicate that the next wave of reforms on the drawing board is even more ambitious than anything we have seen to date – they really are moving us strongly away from a shallow or narrow nationalism to a more pragmatic private sector-friendly approach.”
He said the next series of economic reform packages would appeal to both the domestic and international private sector and he believed they would be popular with the public too.
“I believe that the person on the street really gets it and will be longing for these kinds of reforms,” he said, explaining it was in his view only “vested interests” namely the political and business elite who would “have the most resistance” and mobilise the media for the next ‘for rent demos.”
So how is life in Indonesia under Jokowi who has been president for two years?
“The most fundamental change that Jokowi has brought is a complete change in tone and a change in mindset,” Me Lembong said.
When probed he said that change could be seen “in both the public and the government.”
He then explained what he felt was one of the biggest changes under Jokowi’s leadership.
“In Indonesia we always used to talk about how great our nation was but rarely talked about our shortcomings. Now the rhetoric has flipped,” he explained.
“In his public speeches Jokowi only spends 10 to 20 per cent of his time on how great our nation is and 80 to 90 per cent of time on the country’s shortcomings. I cannot emphasise the importance of this enough because to reform, first you have to admit there is a problem. In the past we have always been a bit lazy talking about our shortcomings and instead coming up with rhetoric about how great our nation is. The reforms have turned that sentiment around,” he said.
“Investors are cheered by the president’s realistic tone – his honesty in admitting our shortcomings and his rolled-up sleeves hands on approach on big issues,” he continued.
So what about corruption?
“Corruption is a big issue,” he said. He then explained there were two ways to address it – directly by jailing offenders and indirectly by changing the system.
“Indonesia is among the top countries when it comes to sending governors, officials and legislators to jail for corruption, if you look at the sheer numbers which are in their hundreds,” he said.
”But you have to change the system. Jailing offenders just addresses it, whereas the system is the root cause. So you need to change the incentives.”
‘Indonesia wants to join the TPP’
In October 2015 President Jokowi declared Indonesia’s intention to join the Trans-Pacific Partnership (TPP), the largest regional trade and regulatory deal in history. Four ASEAN countries have already signed up to it. Indonesia is currently weighing up the pros and cons but will have to carry out more reforms to fulfil the accession conditions.
“Our official position is that we want to join the TPP,” Mr Lembong said. “And we are monitoring the ratification process closely but sooner or later something like it will have to come into being because that’s what the future looks like so whether in its current guise or a modified one – that is the way the world (IP, pharmaceuticals, international investment etc) is going. Indonesia can fulfil the conditions for accession because we have to look forward,” he said,
He said it would take two to three years to conclude the EU FTA and one or two years after that to join TPP.
“Look at Indonesia in four to seven years’ time – we will be very different,” he said.
The interview was followed by a private briefing and roundtable discussion with Asia House corporate members.
The internationalisation of the renminbi, deregulation, the next wave of economic policy packages, corruption, the AIIB, exchange rates and FDI, were among the topics discussed.
Corporate members represented at the table included Arup, GSK, Nikkei, Diageo, Jardines, Anglo American, Pfizer, Liverpool FC and NATS.
The next roundtable discussion for Asia House corporate members will take place on Friday, 7 October when Chief Executive Officer of Lloyd’s Inga Beale will join Asia House corporate members for a private briefing. For more information click here.
To find out how to become a corporate member of Asia House email Charlie.Humphreys@asiahouse.co.uk.