Brexit and its Implications for Indonesia

By Maria Renata Hutagalung, Noorman Effendi, Rio Budi Rahmanto, S. Sayoga Angkasa Kadarisman, Yuni Suryati

Britain’s surprised vote to leave the European Union signals a new era for the post-World War II globalization drive, leaving open the question of how best to rein in an increasingly connected and interdependent world economy. Anti-European Union (EU) feelings have deepened among the British in the wake of EU’s inability to respond effectively to the global downturn and the Eurozone crisis as well as to manage the heavy migration from Eastern Europe and more recently waves of refugees from the Middle East. As a consequence on 23 June 2016, Britain has voted, by a substantial margin, to leave the European Union (EU).[i] The new government in United Kingdom has set a timetable for a two-year process that ultimately would see Britain extricated from the EU by summer 2019.

With Britain leaving the EU, regional economic integration will be impacted, not only for the EU but also globally. This article examines the reasons why Britain choose to leave EU and also its implications towards Indonesia bilaterally?

The issue of refugees and Eurozone crisis sparked Britain’s decision to be independent in managing its sovereignty. There are 630,000 foreign nationals settled in Britain in the single year 2015. Britain’s population has grown from 57 million in 1990 to 65 million in 2015, despite a native birth rate. On Britain’s present condition, the population would top 70 million within another decade, half of that growth is immigration-driven.[ii] They oppose the flow of immigrants to live and work in Britain and argue that membership impinges on Britain’s sovereignty. It is further exacerbated since most of Britain’ regulations and laws are decided in Brussels. Another contributing factor is the Euro economic crisis. At the same time, the global recession had a bad impact on the world economy, and the future of Eurozone is more unpredictable. Thus, Britain’s exit sparked turmoil in the financial markets, with long term economic and geopolitical ramifications yet to emerge.

Globally, Britain’s vote will reinforce the backlash against globalization and economic integration that has favored Asia, including Indonesia: Being an emerging market, Indonesia is vulnerable to global economic or political shocks as these shocks trigger a flight to safety. These developments imply that Indonesian stocks and the rupiah would come under heavy pressure in the case of Brexit, particularly as foreign investors hold a large portion of Indonesian stocks. However, the impact of a Brexit-inflicted shock is temporary. Brexit has limited impact on Indonesia. A Brexit will impact the global financial sector.

In this regard, Indonesia can consider these recommendations to be taken.

First, Indonesia should closely monitor and assess the EU-UK Withdrawal Agreement negotiations and ensure Indonesia-EU related agreements will be honoured by the UK. Indonesia-EU agreements that might have future implications are: implementation of the World Trade Organization agreements; Framework Agreement on Comprehensive Partnership and Cooperation (PCA); Voluntary Partnership Agreement on Forest Law Enforcement, Governance and Trade (FLEGT-VPA); and Agreement on European Union on Certain Aspects of Air Services (the last agreement has not been ratified by Indonesia). The main challenge is that the UK has not initiated article 50 to proceed with the withdrawing process so there is not discussion yet.

Second, Indonesia should make an in-depth assessment on economic impacts for Indonesia as a consequence to Brexit considering the UK is an important source of trade (US$ 2.3 billion in 2015), tourism (269 thousand tourist in 2015) and investment (US$ 503 million) for Indonesia. During the aftermath of the UK referendum, Pound sterling dramatically dropped 6% vis-à-vis US dollar and decreased 13% towards Japanese Yen. There have been talks about companies moving from the UK to the European mainland. Indonesia should continue to monitor the economic impact will Brexit have on the UK since this would impact also our bilateral relations

Third, Indonesia must follow closely the possible contagious effect namely a crisis in one country could easily spread to another neighboring state or community. The Asian financial crisis and the Greek economic crisis, for instance, have proven to be very dangerous and prone to contagious impacts. Precautionary measures will ensure stability of Euro. The main problem is the lack of capacity to examine closely in situation.

Taking into account the above options, it is suggested that Indonesia should implement the abovementioned three options, with consideration that the first option should be prioritized. Indonesia-UK relations would have to be reviewed in the context of a bilateral framework. Brexit will leave a room for Indonesia to be more flexible for other untapped potentials, particularly Indonesia-UK’s bilateral relations.

Refereences:

[i]From 282 polling stations placed around the country, 51.9% agreed to leave EU and 48.1% to remain.

[ii] http://www.theatlantic.com/international/archive/2016/06/brexit-eu/488597/

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