Widespread feeling in the business community that the government is
stumbling
Against the symbolic backdrop of a week-long international summit marking the
60th anniversary of the 1955 Asia-Africa Conference, celebrating one of the
landmarks of developing world nationalism, Indonesia has taken a series of
measures that taken together could isolate the country from investors,
alienate long-term trading partners and drive growth rates down.
Jakarta is delivering a mixed message at best. Although President Joko
Widodo on Monday told 700 business leaders from 40 countries attending the World
Economic Forum on East Asia in Jakarta that Indonesia is “an incredible place
to invest” and “I invite you to join our incredible people on an incredible
journey and make incredible profits,” protectionist policies have ruled
Indonesian economic policy for the past two to three years and they appear to
be about to increase.
From moves to force banks and other companies to place their data
centers onshore to making dollar transactions illegal and even banning sales of
beer in mini markets, a number of often capricious and confusing policies have
foreign investors and other wondering if Indonesia wants to withdraw from the
world. The liquor ban may be extended to cover all spirits. There was a recent
attempt to force officials with multinationals to have to pass a proficiency
test in Bahasa Indonesia, the national language, but it was withdrawn after
protest.
“I heard a presidential advisor in a top-level meeting say globalization
has been bad for Indonesia,” said one businessman with good political connections.
“This is being taken seriously.”
The recent decision to ban dollar transactions and invoicing by July 1
is an example. Seemingly designed to shore up the weakening rupiah, it
threatens long-standing contracts, insurance policies and investment tenders
and has businesses scrambling to understand what to do now. The rupiah, which is trading around its lowest
level since August 1998, is the worst-performing currency in Asia this year,
and foreign exchange reserves dropped by almost $4 billion in March as the
central bank stepped in to support the rupiah.
Eko Yulianto, acting director of money management at Bank Indonesia,
told Reuters that with the new regulation, the bank aims to reduce current
demand of at least $6 billion each month for domestic transactions.
“We don’t want a dollarized economy so we need to uphold the sovereignty
of the rupiah,” Eko told reporters at a briefing. “There are still a lot of
transactions using foreign exchange and that has added to the pressure on our
exchange rate.” He said cited as examples the textile, pharmaceutical, chemical
and oil and gas sectors where companies often use the dollar for domestic
payments. Cash transactions in foreign currencies have been banned since 2011
“We have no idea yet how to respond. There was no consultation. We are
just trying to figure out how to respond,” said one multinational company
executive.
Other companies worry about a staggering demand for 40% increase in tax
collections for 2015 over the previous year. The drive has resulted not in an
increase in the tiny number of Indonesians who actually pay taxes but still
actions against companies who suddenly find routine logistical deductions and
other charges denied.
Jokowi, beset by political problems, seemingly has little control over ministries
and little strategic sense of where the economy is going. One very senior former cabinet minister said
recently, “Nobody has a big picture.” Jokowi may be good at solving some
problems and identifying things to manage in a city, the former official said,
“But there is nobody with vision of where the country is going or how policies
fit together.”
This increasing economic nationalism didn’t start with Jokowi. It has been building for several years, built
partly on a belief that with a population of 253 million, making it the fourth
largest country and the biggest in Asean, with a big domestic consumer base and
steady growth throughout the global financial crisis that began in 2008, it can
hold its own. That is coupled with a
feeling, increasingly articulated by senior members of the bureaucracy, that
Indonesia isn’t accorded its rightful place in the greater scheme of things.
Sjamsu Rahardja, a senior economist at the World Bank office in
Indonesia, warned in 2014 that “Strict cabotage rules limiting the ability of
foreign providers to service Indonesian domestic sea lanes, combined with
restrictions on FDI in ports, warehousing, and freight forwarding, mean
Indonesia’s logistics sector is less exposed to competition than its main
regional competitors. And with the Asean Economic Community to be fully
implemented in 2015, there is now pressure on the government to protect
domestic businesses and impose new restrictive measures on trade and FDI.”
Rather than pursuing import substitution to slowly develop a domestic
manufacturing base at home, Sjamsu warned, “Indonesia should participate more
extensively in regional and global manufacturing chains. This would allow
Indonesia to accelerate industrialization by taking advantage of natural
resource wealth, having FDI pay for capital in the form of factories off-shored
to Indonesia and leaving the nation free to focus on investing its own
resources in human capital and programs to facilitate local industries climbing
up the value chain where the value added is greater.
Instead, however, the government of Susilo Bambang Yudhoyono, which left
power last October, cut off nickel exports in an effort to drive domestic
investment in downstream processing. However, that caused distribution
pipelines to China to break down, with prices surging and both supply and
demand shrinking. Nickel went to as high as US$12,000 per tonne.
US mining giant Newmont was forced to production at its Batu Hijau gold
and copper mine and lay off 8,000 workers because of the ban on the export of
copper concentrate, its major product.
The ban, which also covers bauxite and many other minerals, was enacted
to seek to encourage mining companies to add value to their products by
developing downstream industries and processing minerals locally. But despite a
four-year window to put a smelting industry in place, the domestic industry
remains woefully inadequate. The enormous power needs for smelting plants has
meant that Indonesia’s energy grid is unable to deliver enough energy to
far-flung areas where the smelting plants would be needed.
For a variety of reasons including problems with economic policy, the
World Bank cut its forecast for economic growth for 2015. Exports are expected
to remain weak, with China cutting back on coal imports. The domestic market is
also facing problems with high interest rates. The bank’s Est Asia and Pacific
Economic forecast that GDP would grow at a 5.2 percent clip, down from the 5.6
percent it projected in October. in October last year. That is behind the region
as a whole, which is forecast to grow 6.7 percent over this year and the next,
down from a previous forecast of 6.9 percent in October.
“Indonesia was affected by weakness in its terms of trade and commodity
exports, and by the continued impact of policy tightening aimed at addressing
external financing constraints,” the report
The report suggested that Jakarta must urgently to tackle structural
impediments to creating rapid and inclusive growth, generating high-quality
jobs and supporting poverty reduction. But few in the market see any concrete
policies to tackle either falling exports or its trade deficit. Asia Sentinel
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