Analysis: Indonesia’s ‘Hatta-nomics’ Makes Foreign Investors Nervous
Aditya Suharmoko and Rachel Armstrong
Jakarta/Singapore. Growing signs of nationalist policies in Indonesia ahead of major elections due in two years are spooking foreign investors already nervous about emerging markets.
The sprawling, resource-rich archipelago has been one of the hottest investment destinations in a world buffeted by Europe’s debt crisis and slowing growth elsewhere.
But Indonesia’s move towards limiting mineral exports and setting a cap on stakes in mining companies and in banks is adding to skittishness as investors worried about Europe head for safety in the dollar.
On Monday, rumors that the government would issue some sort of fresh capital controls sent the rupiah down sharply, with the currency falling further on Tuesday to its weakest against the dollar since late 2009.
The central bank denied any capital controls were in the works, but five-year Indonesian credit default swaps, which measure the risk of buying the country’s debt, surged. The spread with similar swaps for the Philippines, which competes with Indonesia for foreign investment, swelled to a three-year-high.
Jakarta-based political analyst Kevin O’Rourke calls the policies “Hatta-nomics”, for Coordinating Minister on Economics Hatta Rajasa, a possible contender to replace President Susilo Bambang Yudhoyono in the 2014 presidential election.
“The coordination is in the direction of protectionism and trade restrictions and for ownership limitations,” O’Rourke told Reuters. “There’s a lot of seamless coordination between ministers which usually doesn’t happen and that shows that Rajasa has the upper hand with energy, trade, agriculture.”
Although Indonesia’s politics has fragmented since the three-decade rule of authoritarian President Suharto ended in 1998, the nationalism that was a hallmark of his tenure has endured, and is seen as a vote-winner.
“For the entire Indonesian audience, these measures are very popular,” said Agost Benard, a credit analyst at Standard & Poor’s.
“It’s only disputed by people like us for investment reasons but in Indonesia, no one would think there is anything wrong with these measures.”
The silver-haired Rajasa is among the more popular figures in a government that has seen waning popularity due to corruption scandals. His PAN party is aligned to Yudhoyono’s Party Democrat and the Golkar party to form the ruling coalition.
Rajasa has a history of backing protectionist policies. As transport minister he limited foreign budget airlines to serving the main city routes in Indonesia, to the advantage of less-competitive local airlines
Yudhoyono, in power since 2004, is not eligible to contest for a third term, and may back Rajasa, a relative by marriage. The president’s son married Rajasa’s daughter last year.
Indonesia has announced that it will cap foreign ownership of mines at 49 percent, and also tax ore exports in an effort to encourage the building of smelters in the country.
The central bank is set to announce a rule limiting a single shareholder’s stake in a bank to less than 50 percent, down from the current 99 percent, a move that could scupper a $7.3 billion bid by Singapore’s DBS Group Holdings for Bank Danamon.
Lawyers say they expect authorities could turn their sights to foreign investment in the insurance sector. Currently foreign ownership of insurers is capped at 80 percent.
“This appears to be part of a trend in Indonesia towards greater protectionism and it’s more than just politicking,” said Jake Robson, a partner at the Norton Rose law firm in Singapore.
“It’s the way in which it’s being done that is the problem. It’s the lack of prior consultation and the retroactive impact that is causing the worries with the foreign investment community.”
Andrew Brereton, a corporate finance partner at law firm Clifford Chance in Singapore, warned against lumping all of the new rules as protectionist.
“In the natural resources space there is a clear ‘nationalist’ element to the rules, as there’s a requirement for foreigners to divest to locals,” he said.
“The reports on banking sector regulation however suggest that it would extend to Indonesian companies and families as well and appears, at least on the face of it, to be aimed at improving corporate governance.”
Some investors feel Indonesia may just be notching up protectionism to the level of other countries.
“I think also around the world you’re generally seeing countries become more protective of their strategic assets,” said Mark Matthews, Singapore-based head of research for Asia at Julius Baer.
“We’re seeing the same thing in Argentina, Chile and Brazil. I don’t think it’s something unique to Indonesia. So I think people will be upset about it for a while, and then frankly they’ll get over it.”
Businesses already invested in Indonesia are sanguine about the changes.
“If you’ve got a good opportunity in business…it’s worth pursuing,” said Barry Tudor, the CEO of Exalt Mining, an Australian company with
six coal projects in Indonesia.
“If it is a marginal opportunity, sometimes changes can rock it to the core. We remain confident.”
The problem is that once protectionist measures are introduced, they are difficult to withdraw, said Benard at S&P.
“They are willing to tweak as required, but to reverse them or to liberalize or for Indonesia to have a liberal administration that will embark on opening up to the global economy, I think that’s highly unlikely,” he said.
“Any development in the opposite direction is possible, but that will be moderated by pragmatism.”