Protectionism hits Indonesia’s reputation

14-Jun-2012 Intellasia | FT.com | 7:01 AM Print This Post

When the Indonesian government banned the export of unprocessed rattan, a type of palm tree used to make traditional woven furniture, it hoped to boost the domestic manufacturing industry, creating jobs for the neediest.

But the policy, implemented in January, has backfired, say rattan traders. Much has gone unsold and prices have fallen, hitting poor farmers.

With domestic consumption equivalent to under 20 per cent of production, “what are we going to do with the rest?” asks Lisman Sumardjani, secretary-general of the Indonesian Rattan Businessmen’s Association.

The rattan traders are not the only businesses complaining. From limits on the foreign ownership of mines and banks to export bans on raw commodities and food import restrictions, new protectionist measures have dealt a blow to Indonesia’s reputation as one of the world’s most enticing emerging markets.

“While ineffective government policy could be previously ignored, recent policy initiatives could deter investment and curb GDP [gross domestic product] growth prospects,” argued Anthony Nafte, an economist at the brokerage CLSA, in a note to investors. Nafte has cut his growth forecast for 2013 to 6.4 per cent from 7 per cent to take account of these regulatory issues.

Indonesia’s wealth of natural resources and strong domestic consumption in a nation of 240m people have driven average GDP growth of nearly 6 per cent annually over the past five years. International investors have followed, with foreign direct investment hitting a record 51,5000bn rupiah ($5.5bn) in the first quarter of this year.

Indonesia obtained investment grade credit ratings from Fitch and Moody’s in December and January respectively, helping it gain access to cheaper international loans and cementing its status as a hot investment destination.

But Standard & Poor’s, the third major credit rating agency, stopped short of such an upgrade in April because of “policy slippages,” providing a reality check for investors and officials amid all the hype.

International fund managers have begun pulling money out of the stock and debt markets, moving from a 6 per cent overweight position in May to an underweight position of 8 per cent in June, according to Bank of America Merrill Lynch

Some foreign companies have put new investments on hold, adding to the downward pressure on the rupiah, one of Asia’s worst-performing currencies this year. Indonesia’s foreign exchange reserves fell to $111.5bn at the end of May from $116.4bn at the end of April, as capital flowed out of the country.

On Tuesday, the central bank held its benchmark interest rate at a historic low of 5.75 per cent, balancing the need to support growth given the deteriorating global outlook against a desire to stem the fall in the currency.

Sarinee Sernsukskul, who manages JPMorgan’s Indonesia fund from Singapore, says the country is entering a “transition phase” when the government tries to carry out new regulations after a decade of rapid, less controlled growth. “There are more stringent policies coming through,” and investors can no longer hope to make easy profits by simply buying into the story of strong domestic consumption and resource exploitation, she says.

New limits on the foreign ownership of mines have effectively closed the sector to new international investment, says Kevin O’Rourke, a political analyst in Jakarta. Uncertainty over similar proposals to curb foreign ownership of banks has called into question the $7bn takeover of Indonesia’s Bank Danamom by Singapore’s DBS.

Satria Hamid, a representative of the Indonesian retailers’ association, warns that new restrictions on the import of fruit and vegetables could force consumer food prices up 20 per cent and damage a fast-growing retail industry.

The catalyst for all these measures appears to be a competition for power, position and resources before the presidential election in 2014, when the incumbent, Susilo Bambang Yudhoyono, will step down.

Chatib Basri, an economist and government adviser, thinks that officials have become complacent. “The good times make for bad policy here,” he says. “The economy has been upgraded due to the commodity boom and now people say why should we give all this stuff to foreigners?”

Gita Wirjawan, the trade minister and a former investment banker, accepts that some policies appear protectionist but says the government is simply trying to deepen the economy and create jobs.

“We have not been inconsistent in terms of our efforts to climb up the value chain,” he says. “But the way some people may have gone about doing it and trying to explain it may have become lost in translation.”

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Category: Indonesia

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