Bahanomics In-Depth: Takeaways from our recent trade and geopolitics calls
We recently hold conference calls with Gita Irawan Wirjawan, former Trade Minister and Chairman of the Investment Coordinating Board (BKPM), as well as Mahendra Siregar, the incumbent Vice Minister for Foreign Affairs. Our discussions mostly focused on the impact of the Regional Comprehensive Economic Partnership (RCEP) trade deal and US Presidential elections to the Indonesian economy, as well as recent US-China geopolitical dynamics.
Geopolitical uncertainty may remain near-term overhang for markets. Our speakers concurred that the election of Joe Biden as US President would not necessarily lower geopolitical tensions in the medium-term, despite giving positive sentiment for global markets in the near-term (see also our previous report: Assessing the impact of US elections on Indonesian economy). In fact, as the 20 January US Presidential Inauguration draws near, there is a threat from policy uncertainty and a potential leadership vacuum in the world’s largest economy, given the possibility of: 1) reshuffle in key US government officials, 2) political wrangle between the Republican and Democratic parties, 3) a rocky US Presidential transition.
RCEP’s design should benefit developing countries, including Indonesia. The RCEP trade deal will cut tariffs of around 90% product lines over a 20-year period and is considered a framework for facilitating more standardized trade arrangements (consignment rules, preferential tariffs, documentation requirements). Its member countries include ASEAN plus China, Japan, South Korea, Australia, and New Zealand – the world’s biggest trade pact that accounts for 30% of global GDP and trade volumes. The consensus here is the RCEP could facilitate Indonesia to export more intermediate goods, ultimately accelerating a post-Covid economic recovery. At the moment, Indonesia still sits at the low-end of the value chain of the global economy with low manufacturing productivity (Exhibit 2).
The signing of the RCEP would bring more countries closer to China’s economic orbit. As RCEP comes into force, it also marks a victory of China over the US, which proposed the Trans-Pacific Partnership (TPP) but ended up ditching it after Donald Trump withdrew the US signature in 2017. However, as US-China geopolitical tensions are here to stay, we are likely to see relocation of foreign capital out of China, benefitting Southeast Asian economies. And as manufacturing hubs such as Vietnam and Thailand are already showing signs of overcapacity, Indonesia should receive some FDI spillover, so long as it could improve productivity and cut bureaucratic red-tape. In this case, the on-the-ground implementation and regulatory execution of the Omnibus Law would be crucial in determining whether Indonesia could benefit from the post-Covid FDI waves. To boost capital formation, support from Bank Indonesia (BI) would also be imperative, given the infamously high funding costs in Indonesia.