http://www.asiasentinel.com/index.php?option=com_content&task=view&id=4569&Itemid=226
Indonesia's Growing Economic Nationalism
Written by John Berthelsen
Wednesday, 06 June 2012
SBY might have trouble selling this stuff
With commodity prices falling, SBY's government treads a risky path
Singapore-based DBS Holdings Group announced in April it would pay US$7.2
billion to take over Bank Danamon, Indonesia’s sixth-biggest bank. Only 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 – until after the new ownership rules are promulgated
and Singapore agrees to reciprocal arrangements for lenders operating in the
two countries. No one is certain when that will be. 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 a raft of measures to lock in its position with state
enterprise-driven resource monopolies that could well end up hurting its growth
and global position.
That has troubled the international 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 for instance, the
government announced that a government-linked company, the Indonesian Ports
Corporation, would take on the monumental job of building a US$1.9 billion new
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 had previously cancelled international
tenders for the terminal, outraging private-public consortia that had devoted
considerable funds into preparing the bids only to see them thrown out.
These protectionist predilections, built on the country’s steady 6
percent-plus growth and its stellar performance 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
FDI as the path to prosperity. Jakarta, however, is aware that it presides over
Southeast Asia’s biggest economy. Domestic consumption insulated it from the
global financial crisis. It’s also 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 because of their desire to tap the US$1.1trillion
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 into effect 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.
The divestment must begin during the sixth year of mining production.
Under the existing regulations, by the sixth year Indonesian investors must own
at least 20 percent, 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 addition, in April the government said it plans to impose a 25 percent
export tax on coal and base metals this year, jumping to 50 percent in 2013 as
it looks to looks to boost domestic investment and take a bigger slice of
mining profits.
The country’s ambition to own operations could ultimately 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 altogether, before hiring them back as fee-based contractors.
Freeport currently operates under a 30-year contract of work that allows
the company to own 90.64 percent of the mine, the government of Indonesia
owning the remaining 9.36 percent. The parent company, believing it has an
ironclad contract, has previously said that any changes to the contract of work
would require mutual agreement between Freeport McMoRan and the government of
Indonesia.
After the new divestment rules were announced in February, Freeport said
it would be unaffected by them. However, sources in Kadin say that if they have
their way there will be no more profit-sharing and no more long-term mineral
rights. Although Freeport has expressed confidence in the current agreement, it
has reason to be concerned.
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 instead
belongs to state-owned enterprises such as the national energy company
Pertamina. The chamber officials suggest that because of the article 33 clause
in the constitution and the way that Sukarno allowed foreign exploitation of
resources, foreign companies are able to claim billions in assets on the basis
of the ore or gas they can extract – using that to raise money from investors
as apparent "owners" of Indonesia's resources.
Kadin wants Indonesia to "own" the resources and just have service
contracts with foreign companies. In so doing, chamber officials assume the
state-owned enterprises could raise hundreds of billions in IPO money. Now that
Indonesia is rich and realizing its potential, they say, it may be time to
complete Suharto's 1958 revolution, kick out the foreigners, take away their
concessions – and turn it all over to Pertamina.
The government appears aware that the protectionist measures against the
extractive industry sector will have a deleterious effect, especially in
exploration, where most of the high-end activity is carried out by high-tech
multinationals with the ability to go where domestics don’t know where to look.
Exploration has come to a virtual stop because of the tightened investment
rules.
But the government and Kadin assume that eventually they will develop the
ability to handle the fallout and that in any case, Indonesia gets a bigger
share of a smaller pie – and it’s their pie. These protectionist measures
extend beyond minerals. Last October, in an effort to boost the country’s
stagnant palm-oil refining capacity, the government introduced a new export tax
structure with wider differences between crude and refined palm oil, enabling
the country, the world’s biggest palm-oil producer, to sell cheaper refined
products and gain market share against Malaysia, which has been looking for
countermeasures and so far hasn’t found one.
In the meantime, according to the Trade Knowledge Network of Southeast
Asia, Indonesia has been using a number of stratagems through non-tariff
measures including expanding quarantine requirements for various import
products and using the Indonesian National Standard instead of international
standards for various imports. According to the Industry Ministry, there are 86
obligatory Indonesian National Standards, SNIs, and 6,000 non-obligatory SNI
standards that must be met although the World Trade Organization must approve
the list. Indonesia has been a WTO member since 1995.
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 products face antidumping and safeguarding measures
implemented by more than 12 countries, according to the Trade Ministry. It’s
unclear what the next moves will be. One source describes the tightening
process as “seeping.” But it will continue.
(This was written for YaleGlobal, the publication of the Yale University
Center for the Study of Globalization. John Berthelsen is the editor of the
Asia Sentine
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