Indonesia and Malaysia set up a committee to improve bilateral economic ties last week, as newly published figures revealed a deepening trade deficit in favour of northern neighbour Malaysia.
Rafidah Aziz, Malaysia's minister of international trade and industry, and Mari Elka Pangestu, Indonesia's minister of trade, signed an agreement to set up the Joint Trade and Investment Committee (JICT) on January 12, at the annual consultation between the two countries in Putrajaya, Malaysia. The committee will be chaired by the two ministers.
The board aims to put in place measures to boost bilateral trade and investment while promoting networking and business opportunities. Market access will be prioritised, with a focus on allowing the private sectors in the two countries to set up joint ventures and pool information.
The memorandum of understanding recognises that a variety of negative issues have dominated relations of late. Territorial disputes, focusing on islands on the border between the two countries, have played a part to limit the potential for increased cooperation. In addition, allegations over the poor treatment of Indonesian migrant workers in Malaysia have raised tensions.
"The memorandum will intensify our trading activity and foreign direct investment in Indonesia," Abdullah Ahmad Badawi, Malaysia's prime minister, said at a joint press conference with Susilo Bambang Yudhoyono, Indonesia's president. "Malaysia is increasing its foreign direct reinvestment in Indonesia."
Indonesia already attracted its fair share of foreign direct investment (FDI) in 2007. Figures released on January 7 by the Investment Coordinating Board (BKPM) reveal that realised FDI reached $10.34bn in 2007, a 73.2% rise over 2006.
This greatly surpassed BKPM's target of $5.4bn in actual FDI for 2007. Meanwhile approved FDI topped $40.1bn in 2007, a 156% increase on 2006 levels.
"Indonesia's growth looks like it can only be checked by external shocks, collapsing infrastructure or a slow down in reforms," Joachim von Amsberg, the World Bank's country director for Indonesia, told OBG.
The largest sources of realised FDI were Singapore with $3.75bn, the UK with $1.69bn, South Korea with $627.7m and Japan with $618.2m.
Meanwhile Malaysian investments in Indonesia were already at $300m in the first nine months of 2007, the last date for which figures were available. Investments from Malaysia totalled $307m in 2006.
In the first three quarters of 2007, real trade was skewed in favour of Malaysia, with Indonesia witnessing a total deficit of $662m, according to statistics from Indonesia's Central Statistics Agency (BPS). Due to rising oil prices and their knock-on effect on the bill for Indonesia's refined oil imports, the $1bn surplus recorded in the same period of 2006 has been quickly transformed into a deficit for Indonesia.
"As national production cannot meet the demand, we import 400,000 barrels per day, which has led to the increase of Malaysia's share," said Kurtubi, an energy analyst who heads the Independent Centre for Petroleum and Energy Economic Studies at the University of Indonesia.
The two countries also have important relationships in other sectors such as mining and plantations. Total bilateral trade reached $10bn in the first ten months of 2007. Malaysia is the 10th biggest trade partner for Indonesia, and the second biggest after Singapore in the ASEAN region.
Indonesia's most important imports from Malaysia are oil and hydrocarbons, transistors and telecommunications products; while Malaysia imports vegetable oil, cocoa, steel and crude oil from Indonesia.
During the press conference, Indonesia's Yudhoyono highlighted the need to further diversify trade and investment, with a number of sectors ripe for increasing cooperation. High reserves of natural resources in both countries have the potential to fuel economic growth for both governments.