Editorial: Indonesia Can Negotiate From a Position of Economic Strength

Jakarta Globe, Editorial, April 05, 2010

With the stock market surging, the economy growing and the political climate stabilizing, Indonesia is gaining clout with foreign investors and countries. (Antara Photo/Andika Wahyu)

With the uncertain political conditions that dominated the scene over the past four months now receding, overseas investors are once again focusing their attention and capital on Indonesia’s strong economic fundamentals.

Driven by strong foreign buying, the Jakarta Composite Index rose 2 percent to reach a record close of 2,887 on Monday, scaling its previous peak of 2,830 on Jan. 9, 2008. The stock benchmark has already climbed 15 percent this year and is poised to go even higher if economic conditions continue to hold.

The rupiah also advanced to its strongest level in more than two years, trading at 9,058 against the dollar on Monday.

Much is riding on Bank Indonesia’s policy meeting today where it will decide whether to maintain interest rates at a record low. This is vital because low rates drive economic growth by keeping borrowing costs down for businesses as well as individuals. It is no coincidence that the current consumer spending boom has coincided with this period of historically low interest rates.

The central bank must continue with its policy of holding down interest rates as well as its support for the rupiah. A strong currency not only helps to keep inflation low but also allows the government to project a strong foreign policy. Indonesia can only play a bigger role on the regional and global stage if its economy and its currency are sound.

This also helps in negotiating trade agreements with its neighbors and other potential partners. The visit of Chinese Prime Minister Wen Jiabao illustrates our nation’s growing regional clout. China wants to increase its investments in Indonesia, particularly in the infrastructure, energy and manufacturing sectors.

China views Southeast Asia as a strategic region, having allocated $15 billion to invest in member states of the Association of Southeast Asian Nations, which implemented a free-trade pact with China on Jan. 1.

Indonesia, however, has not received the lion’s share of this budget despite being the biggest economy in the region and having the most potential for growth. Over the past four years, China has invested a relatively paltry $265.5 million in Indonesia, much of it in infrastructure, according to the Ministry of Trade. The main impediment to foreign funding is the country’s ailing transportation and energy networks, which make it difficult to realize bigger returns on investment.

China is not the only major economy looking to deepen ties with Indonesia. The country’s growing stature will prompt other nations, both large and small, to seek stronger partnerships, but Indonesia will only reap maximum gains if it is able to negotiate from a position of strength.