Indonesia Defence & Security Report Q4 2013 - New Market Research Report

From: Fast Market Research, Inc.
Published: Wed Sep 25 2013

BMI View: President Susilo Bambang Yudhoyono is due to leave office in 2014 and the political transition will be a key moment for the Indonesian state. Yudhoyono has achieved some notable successes, notably helping Indonesia's young democracy become further entrenched. However, the military and other vested interests remain overly powerful and there is always the risk that the upcoming election may be a trigger for the kind of communal violence that has afflicted the country in the past.

Strategically, Jakarta has been growing in stature as the driving force of the Association of Southeast Asian Nations (ASEAN) group and as an important mediator in the maritime disputes between China and several ASEAN states. China's agreement in July 2013 to begin discussions about a new Code of Conduct for the South China Sea is potentially a big step forward in terms of maintaining peace and stability in the region, and Indonesia takes some of the credit owing to its diplomatic efforts. Elsewhere, relations between Indonesia and its immediate neighbours - especially Australia, Malaysia and Singapore - are better than ever.

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Jakarta has succeeded in maintaining cordial relations with both China and the US, unlike some other countries in the region. Indeed, its relations with both countries can be said to be improving. Sound relations with these and a number of other international partners are helping Indonesia to modernise its ageing military despite a limited defence budget. In Q2, Indonesia and Turkey signed a deal to start jointly producing a new type of armoured vehicle - the latest in a line of international tie-ups. Also in Q2, Australia agreed to give Jakarta four additional C-130H Super Hercules transport aircraft on top of the four it has already supplied.

New defence equipment on order currently includes: Boeing AH-64D Apache Longbow attack helicopters from the United States; Sukhoi fighters from Russia; light combat aircraft from Brazilian firm Embraer; tactical transport planes which Airbus Military builds jointly with local aerospace company PT Dirgantara; a frigate from the Netherlands' Damen Schelde Naval Shipbuilding; and advanced trainer aircraft and diesel-electric submarines built by South Korean companies KAI and DSME respectively.

A fast-growing defence budget has of course enabled these acquisitions, although spending has not increased at the rate that President Yudhoyono previously pledged. Yudhoyono said that spending would rise to 1.5% of GDP by the time he left office in 2014, but the budget remains stuck at 1% However, some question marks have emerged over the Indonesian economy in 2013. While most analysts expect Indonesia to carry on growing, a decline in the value of the rupiah and a worsening trade deficit mean that the risk of a serious economic slowdown has increased. This would hamper Indonesia's ability to continue growing the defence budget and to invest in new military capabilities.

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