Policy Missteps Seen As Hurting Indonesia’s Appeal to Investors

Policy Missteps Seen As Hurting Indonesia’s Appeal to Investors

By Francezka Nangoy on 12:30 pm October 5, 2013.
DBS Group Holdings’ decision to bail out of its planned acquisition of Bank Danamon Indonesia this year may be one example of why investors are concerned about nationalism and protectionism issues in Indonesia. DBS’s deal was the most anticipated acquisition in Indonesia’s financial sector, highlighting the interest of foreign investors in Indonesia’s growing economy.Yet, as soon as the acquisition plan was made public, DBS faced criticism that was vocalized by local banks — namely state-controlled Bank Mandiri. Indonesian banks were asking for reciprocity as they argued that foreign banks, especially those from Singapore and Malaysia, can easily enter Indonesia but at the same time Indonesian lenders face difficulty in entering markets abroad.

DBS dropped the bid in July after the central banks said it would be allowed to only purchase a 40 percent stake in Danamon. Bank Indonesia may allow DBS to increase the stake but it asked for “reciprocity,” meaning that the central bank asked for easier ways for Indonesia’s state-owned banks to enter Singapore’s market as a trade-off for higher ownership in Danamon.

Following the 1997-98 Asia financial crisis, Indonesia’s banking system has undergone a dramatic transformation and now has one of the most open financial systems in the world. It has about 120 commercial lenders, but about 60 percent of total banking assets are controlled by the top 10 banks.

To ensure a stronger and healthier banking system, Bank Indonesia released a set of new regulations that include capping foreign ownership in local banks at 40 percent. The new regulation also says that an institution’s ownership is limited to one bank.

As world leaders and business executives descend on Bali for the APEC summit in the next few days, such changes are happening not only in the banking sector, but also in other economic and trade policies.

The World Trade Organization highlighted these concerns on their latest assessment on Indonesia’s trade and investment policy.

“A number of measures — including export restrictions and taxes on raw resources, tighter import licensing requirements, point of entry restrictions on imports, ownership limitations on banks and certain divestment requirements for foreign mining companies — have recently raised concerns about the direction of trade and investment policy-making,” the WTO said.

In the mining sector last year, the government started restrictions on exports of unprocessed minerals based on the 2009 Mining Law. The regulation is aimed at preventing over-exploitation of ore including tin, nickel and copper before the ban of raw mineral export is implemented in 2014, and to boost value-added exports as a means of staying competitive. From 2012, only companies currently building smelters are allowed to continue exporting raw minerals and a progressive tax is applied to their exports.

“The trade policy of Indonesia is specifically designed so that Indonesia can move up on the value chain. This is only for Indonesia to try to become half as good as the Koreans, half as good as the Japanese,” Trade Minister Gita Wirjawan had said. “We want people to make money here.”

The mining law is expected to create a new industry — the smelting industry, which is lacking in a nation that is rich in tin, nickel and copper. Investment is expected to rise and new jobs would be created for many Indonesians.

Some businessmen said the changes are understandable and good for the economy in the long term. However, some of them say the policies create uncertainties and investors hesitant to part with their money.

Such thinking has cost Indonesia its positive outlook from Standard & Poor’s. The credit rating agency downgraded its outlook on Indonesia to stable from positive, holding off the possibility of an investment grade. “Slow progress in improving critical infrastructure, along with legal and regulatory uncertainties and bureaucratic obstacles, detract from Indonesia’s growth potential,” S&P said.

Fitch Ratings and Moody’s Investors Services placed Indonesia on investment grade last in 2011.

Meanwhile, in the new economic policy package plan unveiled in August, the government said it will ease restrictions on raw mineral exports. This was misinterpreted as a plan to postpone the 2014 deadline, adding confusion in the market.

Still, Hatta Rajasa, the coordinating minister for economic affairs, emphasized that the policy will not postpone the 2014 deadline. Instead the government will ease ore exports through other means like removing export quotas and remove bureaucratic red tape in exporting.

The quota was removed in a bid to help the rupiah amid concerns that Indonesia’s currency will weaken further against the US dollar as the current account deficit widens. Shipments of minerals might help narrow the deficit. Exports from the mining industry contributed about 17 percent of Indonesia’s $119.32 billion total exports in the January-August period.