Why Indonesia Matters to Australia's Economy

Indonesia is not even in the top ten of Australia’s two-way trading partners. But as I’ll show you in today’s Daily Reckoning, the fourth-most populous country in the world may have the biggest impact on Australia’s future in the next 20 years. That future may even include a highly-unlikely (and unwelcome) day of reckoning.

This week’s edition of the DR will focus on geopolitical events. That’s my beat at The Denning Report. And since it’s my one week of the month to captain the good ship Daily Reckoning, I’m going to take you on a six-stop tour of the most contentious region in the world for the next 50 years — the Pacific Rim of fire. Vade Mecum! Come with me and we’ll see where the future takes us.

The Pacific Rim of Fire

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Source: John Nelson, IDV solutions

To the unprepared investor with no imagination, it may seem like a giant waste of time to look at the markets from a geopolitical perspective. The map above shows the world’s major earthquakes since 1998. The region that seismologists and geologists call the ‘rim of fire’ is…well…on fire. And what I’d like to suggest to you this week is that it may be ‘on fire’ in a geopolitical sense too. That is, an active, hotly-contested zone where natural resource wealth and regional power is at stake.

If anything important happens in the market, I’ll be sure to let you know. But it looks like a boring start. The S&P/ASX 200 futures are up this morning. Even though Wall Street was closed for Independence Day in America, stocks are soaring. The Dow Jones Industrials are over 17,000 and the S&P 500 approaches 2000. Why worry about the affairs and strategies of nations?

That’s a question you should ask Franz Ferdinand, the Archduke of the Austro-Hungarian Empire. You can’t ask him though, because he’s dead. In fact, Saturday June 28th marked the 100th anniversary of his assassination on the streets of Sarajevo. His killing triggered Austria’s declaration of war on Serbia. Then a whole bunch of other triggers relating to treaties were pulled, and the world went to war.

Placid and prosperous financial booms usually precede a good blood-letting. You hope that’s not where we are today. But then some of the world’s most powerful nations — Japan, China, the US, and Russia — are all on the ‘rim of fire’. So are Australia, New Zealand, Indonesia, and Korea. This is where the world’s next great power conflict lies. It’s already a financial conflict. It may become a military one.

I know. It may seem unlikely right now. But that’s why you have to think about it. Ever since the world’s central banks ramped up their credit-dealing ways in 2009, world politics and national security haven’t had much influence on financial markets or stock prices. I suspect that will change soon. Why?

First off, Japan’s Prime Minister, Shinzo Abe, visits Australia this week to sign a historic free trade agreement. The biggest news of last week that nobody really noticed is that Japan’s cabinet has reinterpreted its 1947 Pacifist constitution. In tomorrow’s edition, I’ll focus on Japan, its submarine technology, and what its new alliance with Australia means for the ‘rim of fire’ (and please, no ‘rim of fire’ jokes by email…I’ve heard them all).

Today I want to focus briefly on Indonesia. It’s the world’s fourth most populous country, with 252 million souls. It’s also the largest Muslim country in the world and the world’s third-largest democracy, behind India and the United States. On Wednesday, Indonesians go to the polls to elect a new president.

The two main candidates are Prabowo Subianto and Joko Widodo (Jokowi). The polls indicate a tight race. But what’s at stake? According to Edward Aspinall of Australian National University, it’s the fate of Indonesian democracy itself. In Indonesia on the Knife’s Edge, Aspinall writes:

‘Indonesia’s presidential election on 9 July will determine not only the future government of the country but also the fate of its democracy. Over the past decade and a half, Indonesia has been the democratic success story of Southeast Asia…Now, the country faces a stark choice that could determine not only the health of Indonesian democracy, but perhaps whether it even survives. The two candidates running in this election embody very different aspects of Indonesia’s recent political history, and they promise to take the country in very different directions.’

Now, I confess to knowing very little about Indonesian politics. By press accounts (take them for what they’re worth), Jokowi is seen as the candidate of ‘new democratic era’. Subianto is portrayed a throwback to a more nationalistic, authoritarian past. ‘The rivalry over this year’s Indonesian presidential election…has incited discord in Indonesia unseen since the independence of East Timor in 2002,’ according to Tito Ambyo of The Guardian.

The race descended into pop-culture clownery last week. Indonesian pop star Ahmad Dani released a pro-Subianto video on YouTube, in which he dresses in a Nazi-style uniform and sang a modified version of Queen’s We will Rock You. That’s both amusing and slightly worrying.

Despite not knowing a lot about either candidate or how they might view future relations with Australia, we know that current relations with Australia aren’t great. Leaving aside the issue of East Timor, more recent troubles started with the one-month ban of live cattle exports to Indonesia in June of 2011. The government instituted that ban in response to an expose on the ABC’s Four Corners program which exposed animal cruelty in 11 Indonesian abattoirs.

The ban was lifted. But you can imagine the Indonesians being miffed at being lectured by Australia on how to slaughter cattle. The treatment of the animals may have been cruel by Australian standards, but is it really any of Australia’s business how Indonesia chooses to slaughter its cattle?

We now know the trouble goes back even further. The US and Australia began spying on Indonesia as early as 2007 at the UN Climate summit in Bali. Documents released by NSA whistle blower Edward Snowden revealed that in August 2009, the Defence Signals Directorate (DSD) attempted to listen in on the phone conversations of then-President Susilo Bambang Yudhoyno, his wife, and his inner circle of advisors.

The spying revelations caused Indonesia to recall its ambassador from Canberra in May of this year. That’s a serious move in diplomatic circles. And it came after it was revealed that seven Australian navy ships encroached on Indonesian territorial waters at least six times in December of 2013 and January of 2014. That probably didn’t help relations between the two allies either.

But let’s remember what Lord Palmerston said of Britain at the height of its Empire: ‘We have no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual, and those interests it is our duty to follow.’ Nations have no enemies or allies, just interests, in other words.

It was in the Abbott government’s interest to ‘turn back the boats’. But it’s not in its interest to turn an ally into an enemy. Indonesia has a GDP of around $870 billion. Its two-way trade with Australia was $14.2 billion, according to the Department of Foreign Affairs and Trade (DFAT). It’s not in the top ten of Aussie trading partners.

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Source: Department of Foreign Affairs and Trade

But given its geographical proximity — and the fact that it dominates the shipping lanes and travel corridors that connect Australia with the rest of the world — Indonesia certainly matters to Australian national security. Have a look at DFAT’s top five imports to Australia in dollar value for 2013. Notice anything particular?

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Source: Department of Foreign Affairs and Trade

Australia imports nearly $40 billion worth of crude oil and refined petroleum. All of that has to come by sea. That means most of it must pass through or near Indonesian territorial waters. And it’s for that reason that I’ve concluded Australia’s economic prosperity is much more vulnerable than it looks.

Have I jumped the shark? You can decide for yourself. My newest report is about three lethal weaknesses that make Australia more vulnerable than anyone realises. I’m sure I’m going to cop it for publishing that. But you can see why I’ve made the case here.

Tomorrow, we continue our tour of the rim of fire with a trip to Japan. In the meantime, please send comments, questions, outrage, praise, and anything else to [email protected]. Put ‘invasion’ in the subject line so I know it’s about today’s issue.

Regards,

Dan Denning
for The Daily Reckoning Australia

Read the rest of this article at The Daily Reckoning