Is Indonesia Ready to Handle Saudi’s Billions?

By Dioputra Ilham | 16 Mar 2017
Economy | 0 Participant(s) | 0 Response(s) | 1618 Views

Written by Nina Aliya, Ramadinan Saptara, and Monika Febiola

 

Saudi Arabia is known as the black gold capital of the world, a powerful wielder of extreme wealth and valuable resources. Decades of exploitation has left Saudi Arabia to face the imminent threat of oil depletion, a resource that accounts for approximately 45 percent of its economy. This has led Saudi Arabia to pursue opportunities to diversify its economy in an attempt to decrease its dependence on oil. The East Asian region has become a lucky focus of Saudi Arabia’s economic and business pivot away from the United States. When King Salman landed at the Halim International Airport in Jakarta earlier this week, welcomed by both President Joko “Jokowi” Widodo and Governor Basuki “Ahok” Tjahaja Purnama, Indonesia fell into a flurry of potential Saudi billions. But why exactly is Saudi Arabia doing this? Where does Indonesia come to play? And is Indonesia ready to handle the potential billions Al Saud might throw at it?

 

Over the last decade, the world has seen a crash in global oil prices from a soaring USD $100 per barrel price tag to USD $30 per barrel. This nosedive has evidently affected the desert nation as its deficit rocketed to USD $98 billion in 2015 and USD $79 billion in 2016. King Salman bin Abdulaziz Al Saud’s domain has also experienced a slump in its GDP growth with a mere 1.4% boost as compared to the 4% climbs the state has enjoyed over the past ten years. However, with oil constituting 50% of its GDP and 85% of its exports, it is no wonder that Saudi Arabia’s economy is suffering from the circumstances.

To reduce its dependence on oil exports and boost its international economic position, Chairman of the Council of Economic and Development Affairs Deputy Crown Prince Mohammad bin Salman responds by standing at the helm of Saudi Arabia’s Vision 2030.  Saudi’s ambitious plans include increasing its non-oil exports’ meager 16% share of the GDP to 50%, establishing a green card system to improve its investment climate, building specialized economic zones for financial and digital services, as well as creating a holding company for its military industry. Along with that, it is also targeting to expand its capacity to welcome 30 million pilgrims every year along with other improvements to its tourism sector. Other specific areas mentioned by King Salman’s 32 year-old son include its retail industry as well as many more designs up his sleeve.

With developed nations slowly but surely weaning itself off oil, Saudi Arabia needs a place to channel its oil industry and buyers when Aramco—Saudi’s national petroleum and gas company—holds its initial public offering (IPO) later this year. What makes Indonesia particularly enticing for the desert monarchy is that apart from being the fifth largest nation in the world, it is also the fifth largest oil consumer in Asia.

Home to around 260 million people, Indonesia also has the largest Muslim population on the globe. This shared religious affiliation is not merely important to ease further amiable relations, but it also means that it has a lucrative Islamic finance industry that may accommodate the budding services that Saudi aspires to provide.

It definitely does not hurt that Southeast Asia’s largest economy has a relatively stable political atmosphere with sound infrastructure reforms underway; as a result, the archipelagic state has received USD $7.5 billion in foreign direct investments in the last quarter of 2016, reaching an all-time high since 2010. Indonesia may also serve to be a valuable non-oil market for Saudi as the fourth largest middle class is forecasted by Euromonitor to expand from 17.3 million households (2014) to 20 million by 2030. Saudi Arabia may currently be Indonesia’s biggest trading partner from the Middle East, but with other Arab nations such as Iran vying for a bigger piece of the Asian pie, it should aim to keep it that way.

 

King Salman’s meeting with President Jokowi resulted in the signing of 11 agreements, binding the two countries to several forms of economic cooperation, including:

  1. Funding by the Saudi government into the development projects by the Saudi Fund for Development and the Indonesian government;

  2. Joint work programs between the Indonesian Ministry of Cooperatives and Small and Medium Enterprises and the Saudi Small and Medium Enterprises Authority regarding the development of small and medium enterprises; and

  3. Trade programs between the Indonesian Ministry of Trade and the Saudi Ministry of Trade and Investment.

The signing of these 11 agreements involved a Saudi pledge to invest USD $1 billion in development finance in Indonesia and expanded cooperation into other areas such as culture and religion, health, education, and combating crime. At a joint news conference, both the Indonesian and Saudi foreign ministers announced a USD $6 billion joint venture between Saudi’s Aramco and Indonesia’s Pertamina. However, Indonesia initially aimed for a total of USD $25 billion in investment from Saudi Arabia, discussing the possibilities of three oil refineries, a power plant, and basic infrastructure such as roads, housing, and sanitation.

With King Salman’s high level visits in Asia, Saudi Arabia has clearly exhibited a foreign policy directed towards strengthening economic ties with Asian countries, resembling the U.S.’ “Pivot to Asia” during the Obama administration. To assess Indonesia’s significance in Saudi Arabia’s Asian policy, it is important to look into the nature and objective of the 11 agreements that bind the two countries to a strong commitment of economic cooperation.

A particularly interesting agreement is the USD $6 billion joint venture between Saudi Arabia’s national petroleum company Aramco and Indonesia’s Pertamina in December 2016, 3 months prior to King Salman’s visit. As oil prices fall and oil deposits continue to deplete, Saudi Arabia has perhaps realised the need to find a partner to maintain and develop its leadership in the oil market. The joint venture binds Saudi Aramco and Pertamina to the Refinery Development Master Plan, an ambitious project that aims to finance the development and construction of Indonesia’s oil refineries. As part of the joint venture, Saudi investment will be directed to upgrading a refinery unit in Cilacap, which is expected to be the largest and one of the most economically contributive unit in Indonesia. By developing and investing in Indonesia’s oil industry, Saudi Arabia can cease to rely on its domestic petroleum. Indonesia thus plays a role in providing Saudi Arabia with a “playground” in which the desert monarchy can implement new methods in maintaining its leadership in the world petroleum industry.

The fact that Saudi-Indonesian agreements are dominated by projects for economic cooperation and development may signify domestic economic concerns in Saudi Arabia. Considering its diminishing oil assets and the potentially fatal overdependence on its oil industry, Saudi Arabia may have recognised the need to diversify its sources of national income and economic development. Concerned with a significant drop in bilateral trade between the two countries, President Jokowi aimed to reenergise Saudi-Indonesian economic cooperation in trade. This may indicate Saudi intentions to strengthen its international trade industry. By having Indonesia, Southeast Asia’s largest economy, as a significant trade partner, Saudi Arabia holds a strong grip in utilising Southeast Asia’s economic potential for mutually beneficial purposes.

 

However, Indonesia needs to reassure its readiness to handle the potential billions Al Saud might throw at it from a variety of aspects. First and foremost, as an emerging market and the most powerful economic power in Southeast Asia, GDP is especially important in order to measure Indonesian citizens’ economic ability. The GDP in Indonesia was worth USD $861.93 billion in 2015, representing 1.39 percent of the world economy, and its annual growth is predicted to be 5.00 percent by the end of the quarter (2016-2020). The GDP describes the general picture of a state’s economy. Less optimistic growth in GDP may cause foreign investors to hesitate or the worst probability, revoke their investment. Indonesia’s current Minister of Foreign Affairs, Retno Marsudi, stated that factors such as political stability, demographic assets, and the performance of government as well as its bodies also weigh in.

It is important to highlight the last factor that Mrs. Retno stated as Indonesia is one of the most corrupt countries in the world according to the annual report published by Transparency International. It is further worsened by the recent E-KTP (Electronic Resident Card) corruption case. Moreover, the previous CEO of Pertamina, Dwi Soetjipto, who signed the Refinery Development Master Plan with Saudi Arabia’s Aramco has been dismissed along with the Deputy CEO, Ahmad Bambang. Dwi Soetjipto was deemed to have overseen efforts to eliminate corruption and reduce Indonesia's fuel imports, including by developing domestic refining capacity. Institute for Essential Services Reform (IESR) of Indonesia even demanded that a more professional and integrated CEO be appointed by the president during the temporary replacement, emphasizing on the urgency. As a resolution, the vacancy is now temporarily filled by Yenni Andayani for up to 30 days until the president can appoint a new CEO for Pertamina.

Although Pertamina has asserted that the sudden dismissal has nothing to do with the conflicts that Pertamina faced in the past and was caused by a management ‘shake-up’, the company is now affiliated with a corruption case. The Attorney General's Office (AGO) is  currently investigating alleged corruption in service payments and fictitious fuel handling implicating PT Pertamina Patra Niaga and PT Ratu Energy Indonesia from 2010 to 2014 even though no suspect has been named thus far. If the allegation is proved true by AGO, it is very disappointing since Pertamina is one of the primary actors in realizing the refinery plans, particularly the Cilacap refinery plan which will be conducted this year. This shows that even though Indonesia may be economically ready to handle foreign investments, we still have yet to tackle the corruption, mismanagement, and incompetency often occurring in government bodies.
 

Indonesia is currently facing extreme tension and pressure from various different directions. On one hand, Indonesia stands to gain a large hand in funding its current development and infrastructure programs especially in its Eastern regions as development disparity is rattling government legitimacy. On the other hand, inherent problems in its infrastructure and bureaucracy gives potential investors ample reason to be wary of investing money in such a fragile environment. Many believe, however, that Indonesia is moving in the right direction and is successfully cracking down on threats to good governance albeit slowly. This leaves us to question: is Indonesia ready to handle the potential billions Saudi Arabia might throw at it? Or will all that money slip into the pockets of its most conniving elites?