The ore export ban : What would Sukarno do?

The ore export ban : What would Sukarno do? Putera Satria Sambijantoro ;   A Journalist at The Jakarta Post

JAKARTA POST,  23 Desember 2013

  

If Sukarno were still alive and leading the country now, perhaps he would have banged the table in a Cabinet meeting in fury, screaming his frustration right into the faces of his ministers on how they had been so weak  and bowed to pressure exerted by foreign mining firms in the new mining law.  The law, which will ban exports of raw minerals starting Jan. 12 next year, was initially introduced to help Indonesia curtail its dependency on exporting raw natural resources by promoting the development of value-added industry, at the same time stopping the country’s highly priced raw minerals from being exploited by foreign mining giants.  The 2014 raw ore export ban has been on the table for years, long enough for foreign mining firms operating here to prepare themselves, yet they have been kicking the can down the road, crying foul over the obligation to build mineral-processing smelters because such an idea, in their view, was not commercially feasible. Truthfully speaking, the foreign mining firms have taken the issue lightly. Perhaps the perception that all Indonesian bylaws are negotiable, that all government officials would be easy to persuade, that this country might need foreign investors more than the other way around, have made them to think that such a ban might be no more than a bluff. So as the deadline draws near and the House of Representatives showed its seriousness to enforce the law, the foreign mining firms were shocked.  They then did everything from lobbying top economic ministers, to giving counter-bluffs in the media over the potential layoffs and huge economic losses that could materialize if the ban on raw mineral expoerts took place.  What foreign mining companies like Freeport-McMoran Copper & Gold Inc. forget is that an Indonesian law is still a law.  No matter how seemingly weak the country and the officials who enforce it, and now matter how powerful and influential your company is, an Indonesian law is something that all firms operating on this country’s soil must comply to. Imagine that today the 21st century Sukarno surfed the Internet using his gadget and unexpectedly bumped into the news published by Bloomberg newswire on Dec. 17, titled “Indonesia’s Cabinet to Discuss Ore Ban Amid Freeport Queries”.  What would Indonesia’s first president say to Coordinating Economic Minister Hatta Rajasa, Energy and Mineral Resources Minister Jero Wacik, Industry Minister MS Hidayat and Finance Minister Chatib Basri? “I, together with the other founding fathers, sacrificed soul and blood for the independence of Indonesia…but now you lads allow this country to be dictated and steered by a US company like Freeport,” Sukarno might say. “What kind of ‘independent’ nation is this?”  In many cases during his presidency, Sukarno was known for overindulgent nationalism and excessive hatred toward foreign firms (especially to the US: He was legendary for his “go to hell with your aid” remark).  However, Sukarno’s nationalistic viewpoint couldn’t be more relevant today. This is because in the case of the new mining law, many foreign mining firms have crafted strong propaganda of how their contribution to the economy is so immense, and that Indonesia needs them more than they need us and our natural resources — while in reality, it may be the other way around.  Nationalism can breed both bad and good policies. For instance, nationalistic sentiment that threatens to impede the plan to revise negative investments’ list (DNI) can be seen as bad, as it could limit the foreign direct investment inflows that Indonesia needs for strong, sustainable economic growth in the long run. But, the nationalistic plan to ban raw mineral exports next year is a good policy, as it could help Indonesia climb up the supply chain by exporting more value-added goods, which eventually would lead to higher export earnings in the long-run, followed by other positive multiplier effects to the economy, such as higher absorption of skilled labor in the mining sector. Of course, there shall be short-term pains if the law really proceeds. A potential loss from the implementation of the export ban would be US$6 billion, which would add to the country’s current account deficit by at least 0.6 percent of gross domestic product (GDP) next year, according to the World Bank. But even the international organization acknowledged that the mineral exports ban would be beneficial for Indonesia in the long-run. “From 2015, the ban would result in a relatively neutral impact on the trade balance, relative to the baseline, as […] gains from higher value processed exports begin to offset the loss of unprocessed mineral exports arising from the ban,” the World Bank wrote in its quarterly economic report released this week. In other words, the implementation of the raw ore export ban to Indonesia will be like medicine injected into the body: It is bitter and painful in the near-term, but will turn out to be very beneficial for us in years to come. Indonesia’s economy has stagnated at the middle-income level for a really long time, and critics have pointed out that only a bold, out-of-the-box policymaking mind set could help this country to jump up to the manufacturing level and thus avoid the “middle-income trap”. For our policymakers, now may be the right time to do just that.  If mining firms complain that smelters to process raw minerals cannot be completed until 2016 or 2017, then it’s their fault for underestimating the issue — Indonesia has given them enough time, now they need to think on how to expedite the smelters’ building process, if they want to avoid incurring bigger economic losses. It is important for government officials to maintain credibility in its policymaking and law formulating process, because what’s at stake here is our country’s reputation in the eyes of foreign investors.  Were Sukarno still alive, there’s no doubt that he would have shouted to his ministers to go ahead with the law, and then motivated the people to rally behind the government.  Afterward, the whole international community shall know that a law in this country is non-negotiable and Indonesia can get really tough on that — hence, they will never take any issues with the government lightly again in the future.  ●

Why so pessimistic about Indonesia?

Why so pessimistic about Indonesia? Putera Satria Sambijantoro ;  A Journalist with The Jakarta Post

JAKARTA POST, 14 Mei 2013

Soon after international ratings agency Standard & Poor’s (S&P) downgraded the outlook for Indonesia’s economy from “positive” to “stable”, economists and market analysts were quick to protest, arguing that the economy could go downhill.

Having been reluctant to grant Indonesia an investment grade status for its sovereign debt papers, S&P instead gave the prestigious rating upgrade to the Philippines, dealing a severe blow to Indonesia and its mission to attract more investment, which has been the country’s major growth driver in the last few years.

Facing an economic slowdown and soaring budget deficit, Indonesia may soon lose its charm as the darling of overseas investors, so went warnings uttered by some economists.

However, the story that went unnoticed was the persisting optimism among foreign investors toward Indonesia, despite the S&P downgrade of its economic outlook.

In theory, a downgrade in credit rating directly affects demand for a government’s sovereign debt papers among investors, who first look at the official recommendations of ratings agencies before putting their money in a certain country.

Strangely, investors stubbornly continued to line up to invest in Indonesia’s debt papers. A government bond auction on May 6 — held only two working days after S&P downgraded its outlook on Indonesia’s economic outlook — was more than two times oversubscribed, with total incoming bids for the rupiah-denominated debt papers topping Rp 20.1 trillion (US$2 billion), far higher than the indicative target of Rp 8 trillion.

The yields only rose slightly in the auction. Bid-to-cover ratio (an indication of the demand for bonds among investors) for debt papers that mature in 15 and 20 years was more than one and a half, an indication that investors still had strong faith in Indonesia’s long-term economic fundamentals.

Meanwhile, on the stock market, foreign investors seemingly did not take S&P’s outlook downgrade too seriously. The Jakarta Composite Index (JCI), more than 50 percent of whose players are foreign, continued its bullish trend by hovering at around 5,089 – an all-time high – only a week after S&P’s downgrade was announced.

Apparently, investors saw more reasons to be optimistic than being pessimistic about Indonesia’s economy. It is a blatant fact that Indonesia does not really deserve to be left out in the cold by S&P, which chose the Philippines for its investment grade credentials. 

Indonesia is Southeast Asia’s largest economy, boasting 240 million citizens, higher than the Philippines’ 95 million. Both economies are consumption-driven, but Indonesia’s — with its population and middle class around three times bigger than the Philippines — certainly guarantees more lucrative business opportunities for foreign companies looking to invest in emerging market economies.

Amid the prevailing global uncertainties, Indonesia boasts a status as one of the world’s most stable economies, with robust household consumption successfully cushioning the country from external shocks. The country’s economy has grown by an average of 6 percent over the last decade, and has never fallen below 4.5 percent since President Susilo Bambang Yudhoyono came to power in 2004.

Compare that with the Philippines, whose period of high economic growth (it recorded 6.5 percent growth last year, higher than Indonesia’s 6.2 percent) was beset with volatility. Its gross domestic product (GDP) growth slumped to 1.1 percent in 2009, a case that highlighted the Philippine economy’s vulnerability toward risks stemming from external conditions.

In addition, Indonesia also has greater fiscal space to boost its economic expansion over the medium term, as its debt-to-GDP ratio currently stands at 23 percent, compared to the Philippines’ 41 percent.

In terms of the ease of doing business, a list published by the World Bank last year put Indonesia at 128, climbing from 131 a year earlier. In the same time frame, the Philippines dropped to 138 from 136.

The number of people living below the poverty line in Indonesia is currently around 12 percent of the total population, while in the Philippines it is 28 percent.

In view of these facts, Philippines newswire interaksyon.com was cynical about S&P’s decision to favor its country over Indonesia for the rating upgrade. It argued that, although the Philippines possessed the prestigious investment grade status, Indonesia would still be the country winning foreign investment coming into the region, thanks to its healthy macroeconomic indicators.

“Jakarta no doubt would love to have our grade,” the newswire wrote in its editorial. “However, our neighbors to the south will just have to make do with all those darned investments.”

It is fair to say that Indonesia’s era as the darling of foreign investors is not yet over, as at present it remains the world’s least unattractive country amid the continuing global economic uncertainties.

President Yudhoyono has always called for optimism, urging people to think from a positive point-of-view, which is why we should not respond to S&P’s downgrade with excessive gloom.

Instead, the downgrade should be seen as a wake-up call to ensure that we do not become lulled by all the bright economic indicators that we have enjoyed for years.

Moreover, the S&P downgrade shows that there is no room for our government to become complacent. This is a timely reminder for President Yudhoyono, whose indecisiveness over several pressing economic issues has caused Indonesia’s economy to punch well below its weight.

Critics have frequently pointed out that Indonesia’s economy would still grow by more than 6 percent, even if the government did nothing to assist the economy. My suggestion to you, Mr. President, is this: Heed S&P’s warning seriously and start introducing the necessary policies to propel our economy forward; you only have a year left to show that the country is not being run on autopilot. ●