Economic Nationalism Rises in Indonesia

A worker at a coal mining site in Samarinda, Indonesia, on March 13. Foreign investors are bemoaning a new law in Indonesia that strips them of control over mining assets, the latest in a rash of regulations that reflect growing resource nationalism. (Firman HIDAYAT/AFP/Getty Images)

Singapore-based DBS Holdings Group announced in April it would pay $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 toward 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.

Protectionist Policies

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 $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 canceled 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 the Indonesian Chamber of Commerce (Kadin), to continue to tighten against international entry.

Under one proposal, raw materials in Indonesia would belong to state-owned enterprises, not the people.

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 $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 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.

Continued on the next page: Owning Resources