Wednesday, October 3, 2012

Economic Nationalism Catches Up with Indonesia

It didn't work under Suharto and it isn't working again
The negative future that economists had predicted for Indonesia given the country’s bout with growing economic nationalism is starting to arrive, with economic data across a wide spectrum beginning to slide.

As Asia Sentinel reported in June 2012, President Susilo Bambang Yudoyono and his economic advisers, governed by a certain amount of hubris built on the country’s steady 6 percent-plus growth and its stellar, consumer-driven economic performance during the global credit crunch that began in 2007, began late last year to tighten the screws on foreign investment and to move toward protecting local industries across banking, mining and other sectors.

That happened just about the time the country’s resource-led economy, particularly in palm oil, coal, crude and timber, needed it least. Trade date released for the month of August indicate that both imports and exports have fallen significantly from July levels although the trade deficit remained slightly positive at a mere US$249 million.

Exports to China, which for more than a decade has been sucking in natural resources exports like a whale takes in plankton, fell 19.8 percent month on month in August, continuing a steady contraction since April, except for a modest 3.8 percent increase in July. Global coal prices have continued to descend as the economic slowdown has cut demand in the world’s biggest coal importing countries, China, Japan, South Korea and India.

Among the apparent victims is the precarious, debt-ridden empire of tycoon Aburizal Bakrie, who according to two research houses in Jakarta may be facing bankruptcy within two years as prices and volumes for Bakrie coal have continued to fall. With the Bakrie companies leveraged to the limit, falling prices have had a negative effect on the conglomerate’s fortunes. Bumi Resources, the country's biggest thermal coal producer, was forced to deny reports that the company was on the brink of collapse.

Although inflation appears quiescent, with both core and headline consumer price inflation declining slightly, overheating looks to be on its way with annual credit growth running at more than 20 percent since 2010. Domestic demand, considered to be Indonesia’s strong point in a region that lives and dies on exports and re-exports, has been fueled with cheap credit. Indonesia’s policy rate, at a record low 2.3 percent, is the lowest in the region. Bank lending growth has been soaring at about 25 percent annually.

The Indonesian rupiah has been the worst performer among Asian currencies against the US dollar in 2012, weakening by 5.5 percent so far although it can be expected to weaken more, driving up the cost of imports and raising the price of exports.

Titik Anas of the Center for Strategic and International Studies in Jakarta in June warned that Indonesian trade policy was going backwards through the introduction of a range of new policies that inhibit trade and threaten the economy, including new regulations on horticultural imports, imports of finished goods exports of 65 mining commodities including nickel, tin, gold, copper, silver, lead, zinc, chromium, platinum, bauxite, iron ore and manganese, which are now subject to a 20 percent export tax.

Indonesia has gone down that road before, eventually learning that import licensing and other policies didn’t work and turning policies around starting in 1985, including trade policy reforms, with exports and economic growth increasing substantially in the wake of the reforms.

The new policies, Anas warned, “will further distance Indonesia from the Asian factory network and erode the country’s competitiveness. So, why is Indonesia moving toward an inward-looking trade policy?”

As Asia Sentinel reported in April, Indonesia’s business and policy elites, beguiled with years of steady growth while the rest of Southeast Asia suffered through the global credit crisis that began in 2007, thought they could reverse the rules of economics. The more restrictive import regime was expected to safeguard the country’s trade balance. It hasn’t worked.

“Hattanomics,” a term for the economic policies of Hatta Rajasa, SBY’s coordinating minister for the economy, was said to have taken over in the presidential palace in which protectionism, trade restrictions and the limitation of foreign capital would prevail. Many felt that while the restrictive measures might cut marginally into gross domestic product, the country’s vast domestic market, numbering 230 million people, would provide a cushion that would allow economic nationalists to seize the reins of the economy from westerners such as 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 altogether, and to hire them back as fee-based contractors. Indonesia expected to get a bigger share of a smaller pie – and it was their pie, the feeling went.

According to the Indonesian Trade Security Committee (KPPI), Indonesia was ranked third after India and Turkey on a list of countries that applied protectionist trade barriers, based on WTO data in 2010. Possibly out of retaliation, Indonesian now products face antidumping and safeguarding measures implemented by more than 12 countries, according to the Trade Ministry. More are likely in a world in which protectionism is continuing to rise. Asia Sentinel

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