US-based bond credit rating agency Moody's Investors Service said it would be credit-positive for Indonesia's sovereign credit rating to join the Trans-Pacific Partnership (TPP) trade deal as participation would mitigate the negative effects of sluggish commodity prices on Indonesia's export performance. Through the TPP, which is one of the world's most ambitious trade deals covering an area that accounts for about 40 percent of world trade, Indonesia will expand its export base, Moody's wrote in a recent report.
The TPP, spearheaded by the USA, is designed to boost trade among its (current) 12 member countries (which include the USA, Japan, Malaysia and Vietnam) as it lowers tariffs for a wide variety of products. Through liberalizing trade to a high degree, the trade deal targets to boost economic growth, support job creation as well as innovation, productivity and competitiveness, reduce poverty, promote transparency as well as good governance, and enhance both labor and environmental protection in its member countries.
Indonesia, which currently holds a Baa3/stable outlook rating (investment grade rating) from Moody's, is struggling with its export performance due to the commodity price slump (commodities account for over half of the country's total exports). Although the country's trade surplus accumulated to USD $7.1 billion in the first nine months of 2015, exports contracted 13.3 percent (y/y) to USD $115.1 billion over the same period, while imports fell 19.7 percent (y/y) to USD $107.9 billion. Weaker import and export figures cause persistent concern about the global and domestic economy. Moreover, Indonesia's trade balance is primarily caused by rapidly plunging imports. This makes the existence of the trade balance less positive than it looks at first sight.
Trade Balance Indonesia (in million USD):
Moody's also emphasized that Indonesia's participation in the trade deal would imply the country has to improve measures to combat bureaucracy and improve the business climate. Southeast Asia's largest economy would also have to allow for greater competition in government procurement, reduce limits on foreign ownership and eliminate import/export restrictions. Such measures would go against some of Indonesia's recently introduced policies.
However, there is still plenty of resistance in Indonesia (from businesses, economists, politicians and the people) regarding the participation in the TPP deal. The key problem is that Indonesia lacks competitiveness. Having a large domestic market, joining the TPP could mean that Indonesia will see a large inflow of foreign goods (possibly disrupting the domestic manufacturing industry), while Indonesia's export performance will continue to struggle as its products cannot compete with foreign manufactured products.
While Indonesian President Joko Widodo supports Indonesia's participation in the TPP trade deal, former President Susilo Bambang Yudhoyono declined the invitation to participate for the following reasons: (1) Indonesia is enhancing preparations for the ASEAN Economic Community, (2) after the ASEAN-China Free Trade Agreement (ACFTA) came into effect in 2010, Indonesia's trade deficit with China doubled within one year only, (3) Indonesia joined negotiations for the Regional Comprehensive Economic Partnership (RCEP), and (4) contrary to other Asian economies, Indonesia is not an export-oriented economy.
Should Indonesia join the Trans-Pacific Partnership deal?
Voting possible: -
- Yes (60.6%)
- No (27.5%)
- I don't know (11.9%)
Total amount of votes: 160