Wednesday, April 22, 2015

Indonesia’s Joko Loses the Economic Plot

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officials with multinationals to have to pass a proficiency test in Bahasa Indonesia, the national language, but it was withdrawn after protest.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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