BMI View: We answer four pertinent questions we believe many would have in mind following the introduction of the mining ban by the Indonesian government on January 12. We believe that adverse macro implications from the ban are definitely in order, given the importance of the mining sector to the economy. While we highlight that nationalist rhetoric or policies are likely to be ramped up in the coming year, such measures are unlikely to be too restrictive in light of mounting economic headwinds. We believe that Indonesia will be a more compelling growth story if policymakers put structural reforms ahead of near-term political and vested interests.
On January 12, Indonesia introduced a widely contentious ban on mineral exports. This came as the government seeks to revamp the resource sector and carve out more downstream industries that will create more value-added for the broader economy. The move was largely in line with our expectations (see 'Economic Woes To Derail 2014 Minerals Export Ban', August 28), as the policy that came into effect was a watered down version of the initial plan, which called for a blanket ban on the export of minerals (for more colour see 'Mineral Ban Watered Down On Cue', January 15). While nickel and bauxite ore exports are still prohibited, other mineral exports will be regulated by a progressive tax that would rise from 20% at present to 60% in 2016. 66 companies that have committed to processing facilities will be exempted from the export ban until 2017.
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|Indonesia - GDP Current Prices By Sector (2012)|
What Macro Repercussions Are To Be Expected?
We have long highlighted that a ban on mineral exports would carry a number of macro implications for Indonesia. To be sure, nickel and bauxite exports account for more than US$2.0bn in annual shipments. This would certainly translate into losses in government revenue through lost royalty payments and export taxes, which are estimated to amount to upwards of US$800mn annually. According to a report by the US Agency for International Agency (USAID), this could lead to US$6.3bn in lost economic benefits every year. The ban also comes at an inopportune time, given that the government has been looking to trim the country's external imbalances. Indeed, the government hiked fuel subsidies (44% for petrol and 22% for diesel) in June 2013 in order to cut back on expenses, narrow the current account deficit and consequently ameliorate the downside pressure on the rupiah. Additionally, we expect to see job losses start to mount as the mining community reacts to new regulations. Adjustments to the mining ban began months ago as more than a hundred businesses have either reduced or shut down operations, which inadvertently led to thousands of lost jobs, a figure which we expect to rise going forward.
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|Indonesia - % Share & Ranking For Exports of Select Commodities|
Just Resource Protectionism Or Economic Nationalism?
Resource nationalism in Indonesia has its roots in the passage of a new mining law back in 2009. Since then, Jakarta has gradually pushed through a series of protectionist policies; introducing a ceiling on foreign ownership of mining assets, requiring divestments of foreign ownership and increasing export tariffs and royalty payments, among others. While the policies that eventuated were more often than not moderated from the initially plans put forth, the persistent rule changes have left the mining sector, and possibly the broader investment climate in a state of flux. Indeed, even at the time of writing, mining companies were still confused by the export ban and were still in the midst of assessing the likely impact on their operations. As a result, a number of miners are still holding back production.
Indonesia's protectionist policies have not been confined to the mining sector. In 2008, a cabotage law was introduced as the first step in Jakarta's plan to carve out its own shipping industry. In 2011, export of raw rattan was prohibited so that the local furniture industry had a steady supply of low-cost rattan. The banking sector was also not spared. Development Bank of Singapore (DBS) Group's multi-billion dollar bid to take over Bank Danamon in 2012 met with stiff resistance from Indonesia's central bank, which refused to sanction the move unless Singapore reciprocated by allowing Indonesian banks easier access to the island's market. In 2013, Jakarta strong-armed ExxonMobil into replacing its country manager for Indonesia following the government's dissatisfaction with progress on the development of one of its major oilfields, as well as the Exxon's failure to sell some of its local assets.
A One-Off, Or More To Come?
A more pertinent question, however, remains whether or not resource protectionism, as well as broader economic nationalism, will maintain course in Indonesia and whether or not other foreign investment-deterring policies will surface going forward.
In our opinion, Indonesia's growing protectionist proclivities could partly be a result of political maneuvering with just months ahead of the parliamentary and presidential elections. Indeed, politics and business interests in Indonesia are largely interconnected. With politicians purportedly having vested interests, particularly within the resource sector, it is unsurprising that resource nationalism and other protectionist policies will feature heavily in the run up to Indonesia's elections. Furthermore, the solid growth that Indonesia has registered over the past few years, coupled with its stellar escape from the Global Financial Crisis, is likely to have emboldened Jakarta's predilection for protectionism.
That being said, we believe that the government is unlikely to want to overplay its hand. Any nationalistic measures that are tabled going forward are likely to eventually be watered down, as was the mineral export ban. Indeed, it remains a core view of our Mining Team that the Indonesian government is likely to further moderate its mining policy in the coming months, with higher export tariffs coming in place of a complete ban on nickel ore and bauxite exports.
To begin with, as we have highlighted extensively, the country has been facing increasing economic headwinds. It has been, and will continue to be in the medium-term, heavily reliant on foreign investment. Not only will foreign participation bring in the necessary financial capital, but also the required technology and expertise, which is essentially what Indonesia needs in order to get more out from its extractive industries. While political motivations are likely to cloud Indonesia's regulatory environment even more this year, we believe that Jakarta fully comprehends the need for foreign participation in the country's economic growth story. As a result, while we do not discount the possibility of a ramping up in nationalist rhetoric or policies in the year ahead, we believe that such measures are unlikely to be too restrictive. Even if they are somewhat extreme when first tabled, as Jakarta's track record would show, the government's nationalistic tantrums are likely to ebb once the elections are over.
Still A Darling?
While the adverse impact of economic nationalism on investor sentiment certainly can not be ignored, we highlight that this is unlikely to be the only factor on investors' minds. Infrastructural developments have failed to match the solid economic growth that the country has registered in recent years. Indeed, infrastructural bottlenecks are among the key hindrances that have deterred investors from growing their investments in the country, even as many have signalled a desire to. Additionally, an opaque and inconsistent regulatory environment has made for a particularly challenging business environment that has more often than not led to an unnecessary rise in business costs. Moreover, corruption still remains rampant and the country's sprawling and inefficient bureaucracy serves as a strong impediment to greater foreign investment. Despite this, Indonesia's superior demographics and abundant resource wealth remains a key attraction to many investors, and rightly so. We highlight that the country will stand to be a more compelling growth story if policymakers put structural reforms ahead of near-term political and vested interests.
Taking into consideration the recent mineral exports ban and the fact that economic nationalism is likely to continue to seep in, we highlight that the risks to our economic growth forecast of 5.4% in 2014 are weighted to the downside. Likewise, we will be looking to downgrade the country's 2015 real GDP growth in the coming weeks.