Indonesia and the Belt and Road Initiative

Indonesia’s Minister of Maritime Affairs signed 23 memorandums of understanding (MoUs) with China while attending the Belt and Road Initiative (BRI) Forum in Beijing. How can the BRI help Indonesia? How will Indonesia de-risk itself from any potential downside?

Background 

In 2013, during Chinese President Xi Jinping's visit to Indonesia, he first proposed the 21st Century Maritime Silk Road Initiative. The Chinese investment under Belt and Road Initiative in Indonesia includes the construction of airports in Sulawesi and the Jakarta–Bandung high-speed railway.

China Railway International won the bid to build this Southeast Asia’s first 104 km high-speed rail. It is likely to shorten the journey time between Jakarta and Bandung from over three hours to forty minutes. 

In April 2019, Vice President Jusuf Kalla touted 28 projects with a total price tag of US$91 billion to be financed under the Belt and Road Initiative when he attended the Belt and Road Forum in Beijing. The projects aim to channel belt and road investments into four “economic corridors” – North Sumatra, North Kalimantan, North Sulawesi and Bali – to tie in with Indonesian president Joko Widodo’s “Global Maritime Fulcrum” vision.

The growing Chinese investment in Indonesia could be both an opportunity and a threat. Indonesia requires foreign investments to finance the current account deficit and to generate economic growth. 

Analysis

Chairman of the Indonesia Investment Coordinating Board Thomas Lembong said the China-proposed Belt and Road Initiative (BRI) is one of the world's most important initiatives in the 21st Century fit to galvanize the stagnant world economy. The Silk Road Economic Belt and the 21st Century Maritime Silk Road Initiative, proposed by China in 2013, is aimed at building a trade and infrastructure network connecting Asia with Europe and Africa along the ancient trade routes of the Silk Road to seek common development and prosperity.

China's BRI is relevant to Indonesia as it can be aligned with Indonesia's Maritime Fulcrum initiated by Indonesian President Joko Widodo. Chinese President Xi Jinping said "I proposed the 21st Century Maritime Silk Road for the first time when I delivered a speech in Indonesia in October 2013. The alignment of the proposal with Indonesia's Global Maritime Fulcrum has enriched bilateral ties”. The two governments have signed a memorandum of understanding on Regional Comprehensive Economic Corridors, the signature project of the second phase of synergizing development strategies between China and Indonesia.

The rail project, part of Beijing’s Belt and Road Initiative (BRI) to connect China with Asia, Europe and beyond was described last month by China’s ambassador to Indonesia, Xiao Qian, as “the first high-speed rail of Southeast Asia”. After nearly three years of delays over land ownership disputes, construction on the rail line, which is financed principally by a $4.5 billion loan from China’s Development Bank, finally kicked into gear in 2018. Ridwan Djamaluddin, Deputy for Infrastructure, Coordinating Ministry for Maritime Affairs, Indonesia said that securing the agreement has taken longer than planned. Indonesia insisted that all deals would follow a business-to-business structure rather than taking any government-to-government loans. "Other countries have been forced to pay back loans and some have let go of their assets. We don't want that.", Djamaluddin said. 

Indonesia hoped that the port cities located along the Malacca Strait that connects the Pacific and Indian Oceans would become the country’s new centres of growth through export and import activity. In the Malacca Strait, Singapore is ahead of Indonesia in the transhipment and logistics market.

CounterPoint 

Analysts say China’s Belt and Road financing scheme is fraught  with risks. It lands vulnerable countries in a debt trap and provides avenues for China to gain footholds in strategic areas around the world.

In the second Belt and Road initiative forum, it was alleged that local companies did not benefit from the Belt and Road because infrastructure-related deals are still strictly given to Chinese companies and they had to open an expensive joint venture. The initiative has also been accused of being China-centric by only funding projects from state-backed banks. 

Assessment 

Our assessment is that President Joko Widodo’s focus on ramping up infrastructure is aimed at reducing inefficiencies and providing better logistics, so that job-creating industries such as manufacturing could grow faster.

It can be noted that about 2 million graduates enter the job market each year while the middle-class group is growing. 20 percent of the 260 million population falls into middle-class category and 1 in 10 Indonesians still lives in poverty. There are three conditions for Chinese investment in Indonesia: they must employ Indonesian workers; they should use environmentally friendly technology, and the technology is allowed to transfer. But the Belt and Road Initiative has seen a massive flow of Chinese workers into Indonesia. In recent years, there have been reports concerning a noticeable number of illegal Chinese workers in the country.

It is also considered that BRI can boost Indonesia’s palm oil industry. Indonesia’s palm oil exports have come under pressure in Europe where lawmakers have approved draft measures on power reform that include plans to ban the use of palm oil in biodiesel from 2021. The Oil World journal estimates that palm oil trade in China will reach 8 million tons in 2020 and likely exceed 10 million tons in 2025.

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