Indonesia Defence and Security Report Q2 2009

Indonesia held parliamentary elections in April 2009, won by President Susilo Bambang Yudhoyono’s Democratic Party, with a presidential vote in July. If no candidate secures 50%, there will be a second round in September. At stake is whether President Susilo Bambang Yudhoyono (who is colloquially known as SBY) can win another five-year term, amid a weakening economy, and a resurgent opposition.

SBY is generally considered Indonesia's most competent political leader in many years, but he has largely failed to carry out much-needed reforms that would boost Indonesia's economic growth to levels comparable with China or India. Although Indonesia has a presidential system, the 550-member Dewan Perwakilan Rakyat (DPR, or parliament) is a powerful body, and thus the outcome of the April election will have a big impact on the next presidential administration.

Election-related violence could occur in places such as Aceh and Bali, and from groups such as Jemaah Islamiah (JI). There is likely to be a strong presence of security forces during the elections. Indonesia has been advised to allow foreign election monitors in areas such as Aceh. In December 2008 the government announced that it was considering whether to authorize the Indonesian Military (TNI) to take over the command from police in the nation's fight against terrorism. Several approaches are being considered for building co-operation between the military and the National Police in dealing with terrorism threats.

While Indonesia has experienced terrorist attacks in recent years, many experts say the risk of further large-scale attacks in Indonesia has diminished with the arrest of hundreds of Muslim militants as suspects.

Indonesia's economy faces downside risks in 2009, owing to severe weakness in its main trading partners, and lower commodity prices. We forecast real GDP growth slowing to 5.0% after expansion of 6.1% in 2008. However, domestic demand should remain solid as inflation and interest rates come down, thus cushioning the economy from a more pronounced downturn. Increased government expenditure may also pick up some of the slack left by falling external demand. Government spending rose by 16.9% year-onyear (y-o-y) in Q308, a marked increase from the 2.2% reached in the previous quarter, as the authorities increased expenditure on health care, education and cash handouts for the poor.

However, at the start of 2009, President Susilo Bambang Yudhoyono proposed a reduction in the defence budget to IDR35tn (US$3.3bn), down from IDR36tn in 2008. The House has approved a IDR33.6tn defence budget for 2009. Defence Minister Juwono Sudarsono had asked for IDR460bn in extra funds to help the Indonesian Military (TNI) conduct operations related to maintaining territorial integrity, and many had expected the President to increase funding. Sudarsono has previously said that if the nation wanted to develop its military satisfactorily, the budget would have to be at least US$10bn.

In February 2009, state arms firm PT Pindad completed its delivery of the first Indonesian-built armoured personnel carriers (APCs). The delivery has been seen as an enormous boost to the morale of the national defence industry by ending the country's dependence on expensive imports. Only the engine of the APC is imported, from French automaker Renault. Defence Minister Sudarsono has also announced that the government expected Pindad to move forward to produce other military equipment, including military vehicles, such as amphibious tanks for the Marines, cannons and other heavy arms, in order to replace the country's aging weaponry.

In February 2009 representatives of the TNI and the Thai armed forced agreed to increase military cooperation, particularly in protecting the Straits of Malacca with Malaysia and Singapore. Indonesia also announced in February 2009 that it plans to build a military post on Nipah Island, part of Indonesia's most outer territory, after recently announcing the island would expand its border region with neighbouring Singapore. Progress on the Defence Co-operation Agreement (DCA) between Singapore and Indonesia has, however, been delayed because Indonesia wants substantive changes made to the agreement’s implementing arrangements.

Looking into the future, we continue to expect that the Indonesian government will increase defence spending by 9% annually, in real terms, over the coming years. Absolute increases will depend on how the country’s economy fares in the face of the global financial crisis and on the future direction of commodity prices.