Nationalist Hurdles Threaten to Undermine Indonesia's Investment Boom

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WILL 2013 be the year when Indonesia’s remarkable foreign investment boom finally tapers off? Early indications may suggest otherwise. The year has only just begun, and barely a week goes by before some large foreign corporation announces its intention to invest in the country or expand existing facilities.


According to the Investment Coordinating Board (BKPM), foreign direct investment (FDI) hit a record 221 trillion rupiah (S$28.7 billion) last year, up 26 per cent from 2011. Indeed, Indonesia has been the darling of foreign investors for several years, enjoying hefty annual increases since 2010. 

Last year’s spectacular performance was at least partly due to the heady optimism that followed the decision of rating agencies in late 2011 and early last year to award Indonesia an investment grade.

But there is more at work here than the positive assessments of rating agencies. Indonesia is currently attracting as much FDI in absolute terms as India, which also enjoys an investment grade rating but has an economy twice the size.

The BKPM claims part of the credit. According to Mr Azhar Lubis, BKPM’s deputy of investment implementation control, one of the reasons was the agency’s introduction of an online tracking system that allows prospective investors to track their application via the Internet.

“They (the investors) feel comfortable submitting investment applications as it no longer consumes a lot of time,” he told the Jakarta Globe last month.

Indonesia’s real allure, however, lies in its large, growing middle class and the well-established desire of its members to spend.

Easier access to credit in recent years has further fuelled consumer spending. Domestic consumption is the major reason the economy has continued to expand strongly during the global downturn.

Yet there are good reasons for expecting FDI levels to ease this year. For anyone who chose to brush off Indonesia’s looming infrastructure crisis, last month’s devastating floods in Jakarta were a rude wake-up call with much of the central business district under water for days. Such events cannot fail to have been noticed in corporate boardrooms in Singapore, Tokyo and Seoul, where most of Indonesia's fresh foreign investment now originates.

Questions are also likely to be asked about other infrastructure deficiencies such as Jakarta’s appalling traffic jams (even in dry weather), and the difficulties the government faces trying to overcome them.

Increasingly, infrastructure problems are becoming major disincentives to doing business. A recent Associated Press article pointed out that local fruit is often more expensive than that imported from China because of the cost of shipping to the capital from outlying islands. And the nation’s antiquated port system means that cement produced in Java costs 10 times more on the outer islands.

But it is not just Indonesia’s infrastructure difficulties that will make prospective foreign investors think twice. There is also the complacency that comes from success. As Australian academic Hal Hill once observed, Indonesian governments tend to adopt more protectionist policies when the economy begins to do well.

Last year, Indonesia implemented import restrictions on horticulture products, a move that has since prompted the United States to complain to the World Trade Organisation.

Other measures include restrictions on the import of meat and raw salt. Only one firm is allowed to import movies. Service sector restrictions are also proliferating across a wide range of businesses.

And last month, oil and gas company Chevron warned Indonesia’s upstream oil and gas regulatory body that it might pull out of the country entirely due to a deteriorating investment climate. Chevron is embroiled in a dispute with the government over an environmental remediation project in Sumatra.

A recent report by accounting firm PwC concluded that “contract sanctity, uncertainty over cost recovery and interference from other government agencies continue to stifle investment” in the oil and gas sector.

This year, local politicians can be expected to adopt even more nationalistic economic stances as the 2014 elections approach. Foreign investors, as well as the government technocrats perceived to be advancing their interests, are easy targets.

Indeed, there have already been casualties. In 2011, two well-regarded economic ministers – finance minister Sri Mulyani and trade minister Mari Pangestu – were eased out of their jobs. Ms Pangestu in particular had been associated with free trade, a point that will not be lost on current Trade Minister Gita Wirjawan as he grapples with the demand for more nationalist economic measures.

Indonesia has a stable government and strong economic growth. But, as foreign investors are beginning to find out, it is also inordinately influenced by ambitious politicians with short- term agendas.

(C) Singapore Press Holdings Limited 

Key Political Risks

Asia is the fastest growing region in the world, and is likely to remain so in 2013. However, a number of risks cloud the picture.

The good news is that domestic demand in the region remains strong and should continue to cushion the impact of weaker external demand on overall economic growth. The completion of national elections in Japan and South Korea in December 2012 should also help reduce political uncertainties. 

But Asian governments will need to guard against the adverse impact of prolonged easy financial conditions on inflation.

Rising inequality also continues to threaten social stability. Ethnic and religious rivalries remain just below the surface in many countries. When combined with government corruption and (in some countries) high youth unemployment, this could become a deadly mix. This seems particularly true of China.

Territorial disputes also require close monitoring. Much diplomatic activity in the new year is likely to be centered on finding ways to reduce tensions over resource-rich islands in the South China Sea, where Beijing's claims overlap with those of Japan, Vietnam and other Southeast Asian states. South Korea and Japan also have rival territorial claims.

North Korea remains the wild card. Inclined to believe its own propaganda, Pyongyang's new leadership could miscalculate, making belligerent moves that plunge the region into a military conflict that nobody wants.

About Me

My name is Dr Bruce Gale and I am a senior writer with the Singapore Straits Times. I studied at  LaTrobe University (BA Hons) in Melbourne and later at the Centre for Southeast Asian Studies at Monash University (MA). My PhD thesis, which focussed on Malaysian political economy, was completed at the Malaysian National University (Universiti Kebangsaan Malaysia) in 1987.

From 1988 to 2003 I was Singapore Regional Manager for the Hong Kong based Political and Economic Risk Consultancy (PERC). 

I have written several books and articles on Southeast Asian affairs, including Political Risk and International Business: Case Studies in Southeast Asia (Pelanduk Publications, 2007). Books on language include Mastering Indonesian: a guide to reading Indonesian language newspapers (Pelanduk Publications, 2008)

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