Welcome to Foreign Policy’s Southeast Asia Brief.
The highlights this week: Indonesia’s Prabowo grabs control of resource exports, the Philippines and Japan build defense ties, Malaysia demands missile refund from Norway, and Singapore hearts AI.
Indonesia to Nationalize Resource Exports
Indonesia will force all exports of selected raw materials to be conducted via a single state-owned enterprise. President Prabowo Subianto made the shock announcement last week in a speech to parliament.
The announcement left not just companies but Prabowo’s own government scrambling. It was reportedly kept under such tight wraps that key officials supposed to implement the policy were only informed of it the day before.
The rationale offered by Prabowo in his speech is that it is a measure to raise revenue by combating under-invoicing. This is when companies declare the value of their exports to be lower than their true value, often selling to related companies abroad and thereby shifting their profits to lower-tax jurisdictions.
To be fair to Prabowo, this is a genuine problem. In 2016, a study estimated the government lost $6.5 billion in revenue because of under-invoicing.
But Prabowo suggested Indonesia could raise $150 billion a year by combating this, which seems optimistic.
Indonesia is in increasingly tight fiscal straits, made worse by the fuel crisis.
Prabowo’s expansive social programs, including a free lunch program, have strained the budget. Last year saw massive cuts to other government spending, from local government and higher education to infrastructure, to try to balance the books.
Yet at the start of the year, analysts predicted Indonesia would breach its 3 percent budget deficit rule. The surge in fuel prices, which will cost Indonesia billions as long as the government stubbornly sticks to fuel subsidies, will only worsen the problem.
Attempts to improve Indonesia’s weak tax collection have fallen flat. So, instead the government has begun resorting to what we might politely term more irregular ways of raising revenues—with state-owned companies playing a central role.
Early in Prabowo’s term, all state-owned companies were placed under the control of a single holding company, Danantara Indonesia, which reports directly to the president.
(The idea, while not necessarily a bad one, was sprung so suddenly that sources told me the Ministry of State-Owned Enterprises was utterly blindsided.)
Danantara then became the beneficiary of a number of unusual developments.
Over 4 million hectares of plantations and a number of mines, which were often turned over to state-owned companies, have been seized. Indonesia’s oligarchs were also “encouraged” to buy Patriot Bonds from the company, which offers low yields of 2 percent. Now Danantara is also set to control exports. Not bad for a company that has yet to even release its legally mandated financial statement. And, all the while, the government has leaned ever more heavily on state-owned enterprises to help fund its policy programs.
This is not even a full accounting of the various headaches dogging the economy.
Add to the list capricious changes in government regulations and an uptick in corruption so severe it prompted a rare protest from the China Chamber of Commerce; a stock exchange scandal that could prompt billions more dollars to exit; and signs the government wants to force private banks to invest in politically favored white elephants.
So, what should we expect next? First, a degree of chaos. The new Danantara-controlled state-owned enterprise to handle exports is supposed to start operations as an intermediary for sales next week and then start direct-trading itself in January 2027. Also, exactly which commodities will be affected is unclear.
A messy rollout will hurt Indonesia’s exports. It could also disrupt global supply chains. In 2024 Indonesia was responsible for about 60 percent of global nickel production, 48.7 percent of the world’s palm oil exports, and 19.3 percent of the world’s coal exports. A second consequence is likely economic damage. On the surface, Indonesia’s first-quarter growth looked solid at 5.6 percent. But worrying signs already abound. Under Prabowo’s watch, billions of dollars in funds have flowed out of the country. The rupiah is hitting record lows against the dollar. Consumer confidence is badly dragging. As disruption hits a key motor of Indonesia’s economy, expect all these trends to worsen.
What We’re Watching
Mr. Marcos goes to Tokyo. Philippines President Ferdinand Marcos Jr. makes a four-day visit to Tokyo this week. Japan and the Philippines have reportedly started formal negotiations for an intelligence-sharing pact. Marcos will also be awarded one of Japan’s highest honors, the Grand Cordon of the Supreme Order of the Chrysanthemum. Exports of military equipment are also expected to be discussed—in particular, Japan’s Abukuma-class destroyers and anti-ship missiles.
This follows Japan’s decision in April to lift its ban on exports of lethal weapons, imposed in the wake of World War II. Both close U.S. allies, Japan and the Philippines are ramping up defense cooperation with each other as their erstwhile key partner becomes increasingly unreliable. The aim is to counterbalance China.
However, this deepening also reflects years of work to deepen ties. Japan for some years has been providing equipment and surveillance systems for the Philippines coast guard. This has helped the Philippines patrol its territory in the South China Sea to which China lays claim.
Norway cancels Malaysia’s missiles. Malaysia is furious that Norway axed a deal to sell it missiles for its navy. The government is now demanding 1 billion ringgit ($251.5 million) in damages. Norway’s foreign ministry refused to issue the export license.
“Exports of some of the most sensitive Norwegian-developed defence technologies will be limited to our allies and closest partners,” it declared. Some speculated the United States might have scuppered the deal. (The United States has denied this, but the naval strike missiles for littoral combat ships sold by Kongsberg Defense and Aerospace contained sensitive U.S.-made parts.) Whoever is to blame, Malaysia is very angry.
According to the country’s defense minister, Malaysia had already paid 95 percent of the total procurement value of 634 million ringgit ($160 million). The refund-plus demanded by Malaysia includes other indirect costs such as removing missile-mounting systems already installed on the ships.
Malaysian Prime Minister Anwar Ibrahim has made no bones about his displeasure. “Malaysia has honored every obligation under this contract since 2018: scrupulously, faithfully, and without equivocation,” he said in a statement. “Norway, it appears, has not felt compelled to extend us the same courtesy and demonstration of good faith.”
Indonesian minister warns U.S. could seize Papua. After U.S. attempts to seize Venezuela and Greenland for their natural resources, Indonesia’s Papuan provinces could be next, declared Indonesian Coordinating Minister for Legal, Human Rights, Immigration, and Correction Yusril Ihza Mahendra in a speech last week.
Yusril added that it was only a six-hour flight from U.S. military bases in Guam to Papua. And that in a war with the U.S., Indonesia would only last four days. These comments may strike many as eccentric, but such suspicions have currency in certain Indonesian policymaking circles.
U.S. sponsorship of secessionist movements in Indonesia in the 1950s leaves a long shadow. So, too, does the Australian-led United Nations intervention that helped secure Timor-Leste’s independence in 1999 as Indonesia ended its occupation. Among those who share such suspicions may be Prabowo, despite being the recipient of U.S. military training.
A policy document issued by the defense ministry in 2021, when Prabowo served as its minister, flagged Papua, where there are active pro-independence rebels, and Aceh, where the fight for secession ended 20 years ago, as vulnerable areas. The document then proposed a number of new bases in Papua. Concern about China receives less emphasis. The puzzling element of this is that Prabowo has also cozied up to the U.S. while president.
Most recently, Indonesia is reportedly exploring becoming a regional maintenance hub for U.S.-made C-130 Hercules military aircraft. Under Prabowo, Indonesia also joined U.S. President Donald Trump’s Board of Peace and is considering granting the U.S. military overflight rights.
Photo of the Week
A Thai monk prepares a rocket during the annual Mon traditional rocket competition, a tradition of the ethnic Mon community where rockets packed with explosives are tethered to cables and launched toward a pagoda in Pathum Thani province on the outskirts of Bangkok, Thailand, on May 24. Anusak Laowilas/NurPhoto via Getty Images
