JUST when Indonesia seems about to confirm its place as the darling of foreign investors, a series of policy decisions has underlined just how deeply rooted economic nationalism is in the national psyche.

Perhaps the most widely publicised development in recent weeks has been the reluctance of Bank Indonesia, the nation’s central bank, to approve the US$7.3 billion (S$9.1 billion) acquisition of Bank Danamon Indonesia by Singapore’s DBS. But there have been others, including tightened restrictions on the foreign ownership of mining companies and the impending curtailment of horticultural imports.

Changes to mining regulations currently being considered include a plan under which foreign mining companies must divest 51 per cent within 10 years, and a proposed ban on the export of unprocessed metals by 2014.

Indonesia’s plan to close Jakarta’s Tanjung Priok port to the entry of fresh fruits and vegetables, reportedly to reduce port congestion, has also sparked international concern.

Given the pro-foreign investor stance of prominent government technocrats, these developments have come as something of a surprise. With the economy continuing to grow strongly despite the global slowdown, there seems little reason for economic nationalists to step up the pressure.

Indeed, until very recently, things appeared to be moving in the other direction. Trade liberalisation in recent years had provided attractive opportunities for foreign investors, while more recent investment level upgrades from Fitch Ratings and Moody’s Investors Service increased foreign investor confidence still further. So too had government pledges to contain the budget deficit while allocating additional resources to infrastructure projects.
Realised foreign direct investment in Indonesia jumped 30 per cent to a record 51.5 trillion rupiah (S$7 billion) in the first three months of this year.

Is overconfidence now encouraging officials to backtrack by adopting protectionist measures?

Economic policymaking in Indonesia is so highly fragmented that it is difficult to be sure if such moves reflect a more general shift in the government’s approach. But there seems little doubt that the tone of debate on economic questions is becoming more nationalistic.

The overwhelming response from the international market of the government’s dollar bond offering late last month, however, suggests that many foreigners are ignoring the warning signs.

Indonesia sold US$2 billion of 10-year dollar- denominated bonds at a yield of 3.85 per cent in a sale that was three times oversubscribed.

There is some logic to this. Many of the recent policy changes proposed by economic nationalists may not turn out to be as draconian as initially suggested.

DBS, for example, is not the only foreign bank affected by Bank Indonesia’s announcement that it intends to re-evaluate regulations allowing foreigners to own more than 90 per cent of a local bank.

The Malaysians are also likely to be concerned, and will almost certainly be making their views known privately. Malaysian banking group, RHB Capital, announced last month that it was awaiting approval from Bank Indonesia for its proposed purchase of smallish lender Bank Mestika Dharma.

That said, some backtracking here is understandable. Indonesia’s remarkably liberal regulations on foreign bank ownership have led to a situation where foreigners now own about 52 per cent of the industry. For some time now, local banks have been complaining that more restrictive policies in neighbouring countries have prevented them from expanding internationally.

Meanwhile, opposition is building to proposed restrictions on horticultural imports. The United States, Australia, and New Zealand claim that the use of alternative ports will add several days to shipping times, meaning that their goods would be of lesser quality when they have reached their primary market.

Many observers believe the move will be challenged by foreign governments as a breach of World Trade Organisation rules. In other words, it may never be fully implemented.

The fate of proposed tightened regulations in the mining industry has also been thrown into doubt by the death last month of Energy and Minerals Minister Widjajono Partowidagdo. A well-known advocate of the new approach, he died of a heart attack on April 21 while mountain climbing on Sumbawa island in eastern Indonesia.

If the above issues were the only ones to consider, then perhaps they could also be dismissed as mere aberrations. Unfortunately, however, there are others.

A ban on raw rattan exports was imposed in January in an attempt to ensure a reliable supply of raw rattan for the furniture industry. Trade Minister Gita Wirjawan is also preparing a ministerial decree that would terminate licences for importing finished manufacturing products that the country already produces.

For foreign businessmen, such developments require careful monitoring.

(C) Singapore Press Holdings Limited