Thursday, June 7, 2012

Indonesia Will Pay the Price for Its Embrace of Economic Nationalism

Indonesia is largely alone in a region that has seen globalization and foreign direct investment as the path to prosperity.
Singapore-based DBS Holdings Group announced in April it would pay $7.2 billion to take over Bank Danamon, Indonesia’s sixth-biggest bank. Three weeks later Bank Indonesia, the country’s central bank, announced that it would issue new rules limiting international ownership in local banks, putting the Danamon takeover on hold. That has dismayed at least three other foreign banks that had plans to acquire Indonesian institutions.

The rules are the latest manifestations of Indonesia’s troubling increasing economic nationalism and antipathy towards multinational investment. Despite the country’s enviable economic growth over the past decade, the government is considering measures to lock in its position with state enterprise-driven resource monopolies that could hurt its growth and global position.

That troubled rating agency Standard & Poor’s, which in late April declined to upgrade Indonesia’s sovereign debt from BB+, one step below investment grade, because the country’s plan to lure investment is at risk from “policy slippages.”

What are these policy slippages? In late April it was announced that a government-linked company, the Indonesian Ports Corporation, would take on the job of building a $1.9 billion port at Tanjung Priok in North Jakarta. It’s arguably the biggest infrastructure project in Indonesia’s history and one of the biggest port projects in the world. The government cancelled international tenders for the terminal, outraging private-public consortia that had devoted considerable funds into preparing bids.

These protectionist predilections, built on the country’s steady 6 percent-plus growth and its stellar showing during the global credit crunch that struck in 2007, have emboldened the government and particularly Kadin, the Indonesian Chamber of Commerce, to continue to tighten against international entry.

Indonesia is largely alone in a region that has seen globalization and foreign direct investment as the path to prosperity. Jakarta, however, is aware that it presides over Southeast Asia’s biggest economy. Domestic consumption insulated the country from the global financial crisis. Because Indonesia is the world’s largest exporter of palm oil and natural gas, and the second-largest exporter of coal, foreign investors continue to beat a wary path in to tap the $1.1 trillion domestic economy and its export potential.

New trading curbs will apply to exports of 14 metals, including iron ore, manganese, gold, silver and copper. Exports will be limited to refined exports only, forcing more value-added production within Indonesia. Mining exploration was brought to a halt, dismaying international investors, when President Susilo Bambang Yudhoyono signed a new law in early March forcing foreign investors holding mining and special mining business permits to begin divesting their operations to Indonesian entities within a five-year period.

Under the existing regulations, Indonesian investors must own at least 20 percent by the sixth year, which must be increased to 30 percent in the seventh year, 37 percent in the eighth, 44 percent in the ninth and 51 percent at the end.

In April the government said it planned to impose a 25 percent export tax on coal and base metals this year, jumping to 50 percent in 2013 as it looked to boost domestic investment and mining profits.

The drive to own operations could drive companies like the US-based mining giant Freeport McMoRan, which operates the world’s biggest copper and gold mine in the Sudirman Mountain Range in Papua, out of ownership, before hiring them as fee-based contractors.

Freeport currently operates under a 30-year contract that allows the company to own 90.64 percent of the mine, with the government owning the remaining 9.36 percent. Freeport, believing it has an ironclad contract, has said that any changes to the contract would require a mutual agreement between Freeport McMoRan and Indonesia.

Freeport said it would be unaffected by the new divestment rules but sources within Kadin say that if Kadin has its way, there will be no more profit-sharing or long-term mineral rights.

Kadin is said to have a scheme to change the resource code in the Constitution so that raw material does not belong to “the people,” but to state-owned enterprises like Pertamina.

Kadin wants Indonesia to “own” the resources and just have service contracts with foreign companies. Chamber officials assume the state-owned enterprises could raise billions in IPO money. Some say, it may be time to complete Suharto’s 1958 revolution by ousting foreigners, and giving their concessions to Pertamina.

The government seems aware that the protectionist measures against the extraction industry will have a harmful effect, especially in exploration, where high-end activity is done by high-tech multinationals that know where to look.

These measures aren’t only for minerals. Last October, the government introduced a new export-tax structure enabling it to sell cheaper refined products and gain market share over Malaysia.

According to the Indonesian Trade Security Committee, Indonesia was ranked third on a list of countries that applied protectionist trade barriers, based on WTO data in 2010. Perhaps out of retaliation, Indonesian products face antidumping and safeguarding measures implemented by more than 12 countries. It’s unclear what the next moves will be. But it will continue.

By John Berthelsen

John Berthelsen is the editor of the Asia Sentinel, an online journal covering news, comment and analysis of politics, business, economics and other affairs across Asia.

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