Normura Claims Policy Shifts May Hurt Growth in Indonesia

Dion Bisara

Nomura Holdings, one of Japan’s biggest investment banks, warned that Indonesia faced a possible backlash in economic growth due to shifts in major policies. The rupiah — prone to volatility — may also feel the pinch, the investment bank said, and it reduced its long-term economic growth projection.

Nomura said that Indonesia’s string of policy changes, including the ownership cap in the mining and banking industries, might hurt economic growth as investors become concerned that such shifts would lead to uncertainty ahead of major elections, namely the legislative and presidential polls in 2014.

“We believe the string of recent policy changes marks a shift in the regulatory regime in Indonesia, which is driven largely by a less conducive political environment ahead of the elections,” Nomura said in an Aug. 2 report titled “Indonesia: Policy swings” that was received by the Jakarta Globe on Wednesday.

In the report that was partly written by economists Euben Paracuelles and Lavanya Venkateswaran, Nomura said these policies were implemented in a very short period of time and signal a shift in the regulatory and policy environment.

The ruling Democratic Party, founded by President Susilo Bambang Yudhoyono, has yet to find a strong a successor to replace him when the end of his second five-year term ends in 2014. The party is becoming more populist in reaction to the rising fortunes of other parties, Nomura said. Under Indonesian law, Yudhoyono will not be eligible for a third term.

The Golkar party, the second-largest party in parliament after the Democratic Party, has endorsed its chairman, businessman Aburizal Bakrie, as its front-runner for the presidency in 2014.

The Democratic Party is still struggling as several party members have been implicated in corruption cases that involve some of its members. The Corruption Eradication Commission (KPK) named Hartati Murdaya, a major Democratic Party benefactor, as a suspect in a graft case.

“We see the rising risk of a policy impasse over this period, or at worst, more policies that restrict investment further,” Nomura said.

The latest policy swings affect sentiment and perceptions of the overall policy environment in the near term, the bank said. That, in turn, will hurt investment, a major factor that has helped Indonesia’s growth momentum amid the global economic slowdown.

Indonesia reported on Monday that its economy, the largest in Southeast Asia, grew 6.4 percent year-on-year in the second quarter, accelerating from 6.3 percent growth in the first quarter. Investments contributed to 32.9 percent of gross domestic product in the second quarter, the biggest share since the 1997 Asian financial crisis. Foreign direct investment in particular increased 30 percent.

Because of Indonesia’s faster economic expansion, the Japanese investment bank in a separate report raised its 2012 growth forecast to 6.1 percent from 5.8 percent.

Still, Nomura warned that the trend for faster growth would not last, referring to Indonesia’s own experience in the aftermath of the collapse of the US investment bank Lehman Brothers Holdings in 2008, which deepened the global financial crisis.

At that time large amounts of foreign capital were withdrawn from the country, and investors did not find Indonesia’s policies very convincing as a major political debate ensued in the House of Representatives on the process of bailing out the country’s banks.

“It is dangerous to have a negative foreign perception, particularly given the current external backdrop; there are risks of a sharp deterioration in the capital account while the current account is already running deficits,” Nomura said.

The nation’s balance of payment deficit — which means outbound expense for goods, services and capital is more than inbound income — is likely to widen as a result, after narrowing to $1 billion in the first quarter from $3.7 billion in the fourth quarter last year, Nomura’s economists said.

That projection was based on a deterioration of Indonesia’s goods trade, which has been in deficit for three straight months through June. The investment bank revised down its forecast on Indonesia’s economic growth for the 2014-2019 period — to 6.5 percent annually from 7.0 percent.

Meanwhile, Harry Warganegara, secretary general of Indonesia Young Entrepreneurs Association (Hipmi), was less worried about foreign investment leaving the country.

“Where else will they go? Foreigners will invest here because they need to and because it will generate profit for them,” he said. Harry also said that local businesses were still confident that the investment climate will be supportive to the business community ahead of the 2014 elections.

“This is the time to boost our domestic industry,” he said.

Nomura also said that foreign investors may still have reason to think that the impact from policy changes will not be hazardous because institutional constraints make policy implementation difficult.

Additionally, regulations “have sound economic rationales and, if implemented properly, may provide longer-term benefits,” Nomura said.