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Its amazing and somewhat anxiety producing to watch both the US and Indonesia democracies struggle over structural reforms. An inflection point seems to have simultaneously been reached in each country, with each nation's future depending on their implementation. In America's case its primarily the troubled rollout of a new and improved healthcare system as well as our budget reform process and in Indonesia's its primarily the ongoing crisis of upgrading the country's basic infrastructure. The promise of ACA beyond the enrollment of the uninsured, was lower costs to employers, who are the primary providers of insurance. That promise appears, for the moment, to be challenged. Indonesia desperately looks for private investment in infrastructure, but after a decade of trying and an ambitious plan (Master Plan for Acceleration of Development), only 5% of the total target has been spent. A period of strong economic growth appears to be winding down, partly due to external factors, but also due to the inability to make the hard political decisions required for structural reforms. In each country, a divided government, is partly to blame. In the US the division is more stark and ideological; in Indonesia, its more about protecting turf and political insiders. There a wider coalition of parties and a host of quid pro quo loyalty mechanisms (many laced with patronage) creates a complex web of relationships that stymy an executive branch committed to reform. Vice President Boediono, recently interviewed by the Wall Street Journal, said, "The formal system is a presidential system, and it's supposed to be that the president can appoint whomever he wishes to appoint in the cabinet. But this is not truly a presidential system like in America because our Constitution says that for quite a number of things the president needs approval from the Parliament. That means that if you are not in the majority, you have to accommodate political parties and appointees within the cabinet. You cannot get away from some kind of coalition. I foresee that in the next 10 years or so this kind of thing will still happen. That's compromise."
Here's my anxiety, I am worried Indonesia cannot afford another 10 years of coalition governments with Ministries that cannot coordinate with each other to enact the structural reforms that will unlock Indonesia's potential and move its people out of poverty and fully integrated in the global supply chains of goods, services, and ideas.
I normally go about my business keeping my American roots a little under wraps. AICC is after all a bi-national association. Right before this year’s APEC meetings in Bali (October), there was the third US-Indonesia Commercial Dialog. Seated opposite from each other around a large square table were roughly 10 CEO’s from each country. I found a seat right in the middle. Its a reasonable spot for someone in my position: our members import as well as export to Indonesia and our membership (although the majority are US firms) includes Indonesian companies that have invested in the US. But, my innate patriotism surfaced when AMCHAM and the US Chamber revealed the results of a survey of 35 US companies: $65 billion has been invested in Indonesia since 2002 and another $61 billion is projected to be invested in the next 3-5 years. 35 is the number of firms that replied, so these numbers are probably a little on the low side. The firms include companies who are in the oil/gas and financial sectors where investment is booked differently than what is normally tracked by the Investment Coordinating Board (BKPM). Instead of a 3rd, 4th or even 7th place, the position BKPM usually shows, the US is likely the largest foreign investor in Indonesia and probably has been for quite some time. Now, while I was in Indonesia a month ago the US was beat up in the press for our shutdown and debt payment issue. The Chinese press agency had the temerity to suggest that the world would better off without the dollar as a reserve currency. My Indonesian friends did not seem swayed by this argument but certainly China, Japan, and Russia’s leaders received a lot of ink for announcing their intentions to invest billions, whereas the study, did not. Perhaps its not our style, and yes, President Obama, was not there. US companies do have significant issues related to investment that need to be worked out with Indonesia. But, on the other hand, the study shows our intention to stay and expand and does so without even mentioning the area of capital market investment where the US is probably the biggest source. So, America’s leaders can stand a little taller in their interactions with their Indonesian counterparts: it is vital that Indonesia policy makers listen carefully to our suggestions on improving the investment climate. As one Indonesian CEO told me after the Commercial Dialog, “your side should have said more about the problems you experience here. Sometimes its harder for us to express them but we have the same ones.”
Steep declines in the rupiah (it briefly passed 11,000 on Friday) stock index and overall confidence-echoing earlier drops-finally sent enough shivers within the government for the President and his economic team to say "enough is enough". Bank Indonesia probably knew its interventions could not last for long against strong headwinds. After a hastily organized meeting of his key economic ministers on August 23, 4 stimulus "packages" were announced by President Yudhoyono. (see accompanying article) Although short on details, they indicate a welcome course correction. Far from comprehensive, they at least set the country back on the path towards a more open regime. Key items announced are:
- Relaxation of export ban of raw minerals and simplified procedures for mining investment. The quotas will likely be lifted but the 20% export tax will remain.
- Adjustment of the negative investment list
- Restricting costly import of diesel fuel and promotion of locally sourced biodiesel (slated to cut $3 billion from current account deficit)
- Use of tax holidays and allowances to promote investment in agriculture, crude palm oil, rattan and minerals, including bauxite, nickel and copper.
- Tax deductions and other incentives for export-oriented, labor-intensive industries (companies that export 30% of production).
- Higher import tax on fully built luxury vehicles
- Removal of import quotas on beef, some horticultural products; reduction of soybean import tax
- Easing of share buy back provisions-up to 20% without shareholder approval
- Central bank measures to inject liquidity and broaden tenor of interbank foreign exchange products
A fair number of Indonesians were surprised by the rupiah's decline and are bewildered by a spreading panic mentality, wondering what went wrong, given the relatively rosy picture of the last 5 years. It may be that not enough has gone right, or in other words, the government sat back for too long resting on the laurels of 6% growth and not paying close enough attention to gathering structural problems. Yes, China's slowing economy and the de-leveraging of emerging market investors in anticipation of tapering of the US Fed easing policies has affected Indonesia. But, Indonesia must also know that its costly energy subsidies, import quotas and unrealistically nationalist policy of legislating the processing of commodities within the country would eventually prove troublesome. Finance Minister Chatib Basri announced: "We certainly cannot control the external situation, but we can fix our domestic problems, thereby sending a signal to investors that the government is aware and serious in addressing the issues. Delivering this signal is what's important." So far Bank Indonesia has kept its prime rate at 6.5% (having only recently raising it 50 basis points). Having lost its appetite for intervening, (foreign exchange reserves still declined 20% over the past few months) BI may have no choice but to raise its rate again. One can only think that Indonesia has wasted several years tinkering with unrealistic policies that had a laudable goal, more value added manufacturing, but lacked enough prerequisites (skilled labor, infrastructure). Rather than be forced to unwind them in the face of strong economic headwinds, the country should have been expanding and improving its antiquated infrastructure, removed rather than created barriers to oil/gas and mining investment, and gone further with bureaucratic and judicial reforms and the removal of patronage behaviors. But, Indonesia will learn from its mistakes, and hopefully, be better off for it. There is no need to panic, Indonesia's economic fundamentals remains strong. The balance sheet of its banks and composition of its debt are stronger than in 2008 and it has competent people at the helm of its key financial institutions. The government also has access to low interest standby loans through the Chiang Mai initiative as well as other facilities that provide protections in the face of high bond payments. The stimulus measures announced may seem too little too late, but at least they are a start. Perhaps there will be more moves to be made down the road, especially in the energy and extractive sector where drilling rates and exploration have been down. The stimulus measures will take time and how they are implemented will be key to Indonesia's future growth and financial stability. Deputy Finance Minister Mahendra Siregar said it well: "Are we late? Yes, we are a bit late, but not too late," "The point is let's not debate about lateness, but focus on the delivery [of policy]. If the delivery is slow, then we will be too late." One hopes that this crisis enables the Finance Ministry to reestablish its traditional role of managing reforms that focus less on rewarding connected players and more on creating conditions that are optimal for all.
President Susilo Bambang Yudhoyono's government has finally moved to to reduce the ballooning energy subsidies that have absorbed far too much of the State budget for years. In the form of a budget revision, the reduction was approved by Parliament with the President's coalition (Golkar, PAN, PKB, PPP, PD) holding together except for the PKS party. A cash transfer program will enable Indonesia's poorest to cope with fuel price increases and subsequent inflation. Getting the program through Parliament involved several flip flops of parties angling for support heading into the 2014 elections. Gerindra's leader Prabowo supported raising fuel prices but his party ultimately voted against it. The same happened with PKS. The leader in Presidential straw polls, Jakarta Governor Jokowi, favors the policy (although his party, PDI-P voted against it) but opposed the cash transfer program, believing the money should be spent to support small scale business development.
The 33% rise in fuel prices only partially ends the subsidy as the current market price for gasoline will still be 50% higher than the new rate. With a cash transfer program estimated to cost $465 million over the next 6 months the estimated savings to the government will be $4.5 billion.
Although we can praise the government for raising fuel prices, its clear that they only did it because their backs were against the wall as declining production and surging demand blew out their budget projections. Up until only a few months ago, government officials still maintained that the subsidies where necessary and should remain. What will be needed now is a concerted effort to reduce the subsidy further (which will stimulate investment in both mainstream and alternative energy production) as well as target infrastructure for how the the savings will be used.
A commonly held view of Indonesia's recent, more protectionist policy decisions (i.e. mineral export bans, beef and horticulture import restrictions, mining divestment rules) is that they are motivated by populist politics leading to the 2014 election. Followers of this view say that once the election is over, Indonesian policymaking will somehow shift back to a more internationalist position. That may be true, but it could also be wishful thinking. A more accurate view may be that a more confident leadership –proud of the nation’s economic resilience in the face of global slowdown, has renewed their belief in paternalist capitalism, the notion that the private sector has a more limited role to play, and that economic development still needs to be controlled by a paternalist state. Its not a new view for Indonesians, and certainly understandable given their colonial experience. Some background:
Since Indonesia's independence the state has accounted for huge swaths of the economy (i.e. agriculture, transportation, utilities, heavy industry, communications), allowing the private sector only to be involved in sectors it could not afford to develop on its own. (oil/gas, mining, distribution, light manufacturing) President Sukarno attempted to combine socialism with nationalism and his successor President Suharto kept many socialist tendencies (5 year plans, agricultural cooperatives) while establishing a myriad of state mandated monopolies, some privately owned. Over time --and as various economic crises demanded-- the State deregulated, gave up key monopolies (steel making, media, rice distribution), reduced sole importer agencies, and began to partially privatize (through equity offerings, and public-private partnerships) some state owned enterprises (power generation, airlines, telecommunications), especially once capital markets opened to foreign investors in 1988. A series of ever changing, and at times confusing, negative investment lists has been employed for decades, restricting foreign ownership in many sectors, as well as opening up others that were previously closed. One could argue that these policies (implemented by a vast bureaucracy) did more to reward well connected local business groups (and their bureaucratic enablers) than develop world class players and led to the inefficient allocations of resources as well as high logistical and bureaucratic costs. But, politically, these policies paid dividends to whoever advocated them.
Post 1998 democratic reforms and the political stability ushered in with the 2004 election (and 2009 reelection) of President Yudhoyono returned Indonesia to the strong 6%+ growth rates it had achieved in the Suharto era even amidst a world wide depression. Yudhoyono’s administration implemented further reforms. The private sector grew and with it, dramatic increases in local as well as foreign direct investment.
During Yudhoyono’s s first term (2004-2009), government statements and initiatives were highly solicitous of foreign companies and investors; the private sector was in many ways unshackled. The state was moving to becoming much more of a regulator of markets rather than an intervener in them. But his second term (2009-2014) has brought many of the restrictions mentioned above, the majority of which are based on creating more value-added industries. Examples are: ban on raw rattan exports to encourage local furniture production, export ban on minerals and requirements to build local smelters. The State here is saying, we think its better for the economy to have more local downstream production of our natural resources and since local and foreign investors aren’t doing it, we will mandate it.
I believe the policy shift resulted more from the 2008 economic crisis when Indonesia maintained its growth rather than politics. Leaders saw that not having a fully open market economy buffered them and was a positive not a negative. The world slow down and continuing high rates of poverty and less than optimal job growth became a context in which the government’s natural paternalist impulses could come to the fore.
Representative of the renewed sense of state “paternalist” capitalism are remarks President Yudhoyono made on April 30 at a National Development Planning Meeting:
“For Indonesia, we all must do this: do not just let everything follow market mechanisms. [That is] very dangerous. The state must take part in having responsibility for the economic conditions of the country… Countries which are very capitalistic and which have surrendered all sorts of things to the market are now making corrections and improvements…When the world experienced an economic crisis, we tried as hard as possible for our economy to continue to grow and to possess sufficient resilience. In the middle of an economy that is still in crisis, if our economic resilience is low, our economy could easily falter. Many countries worry because their economic resilience is not strong –once buffered, it unravels, and the economy can collapse.”
Set in the policy arena, this “not too much capitalism” attitude leads to a recent decision not to allow the private sector to build toll roads in Sumatra. According to Coordinating Minister for the Economy Hatta Radjasa: “Because this project is a [government] assignment, the view is that it [must be performed] by a state enterprise that is 100 percent controlled by the state,” he said. In fairness, the Minister also remarked that the private sector might be given subcontracts.
Another example has been the government’s continuing commitment to energy subsidies that are approaching 20% of the national budget. Believing that they are crucial to the support the millions on the edge of poverty, even though they mostly support the middle to upper class vehicle owners, political leaders face huge political risks to eliminate them or scale them back, although recently the government has been publicly discussing the need to charge more for gasoline. Most leaders know that abolishing them would free the huge sums necessary to build a modern infrastructure that would lower logistics cost and accelerate development. But, apparently here politics trumps paternalism.
Will the 2014 mark a change from this recent tilt away from a more liberal trade and investment regime? This is doubtful in my view. Most Indonesians—including the huge base of young voters, respond to nationalist, broad side politics, whether it comes directly from politicians or from the mosque. So, for example, students demonstrating in Riau have recently demanded the government not allow Chevron to extend its contract over the Siak block. Although Chevron’s share (10%) of the production is hardly “domination”, the prevailing view as articulated by the students and uncontested by the government or local politicians—is that “This foreign domination of our natural resources has increased in recent years thanks to our regulations, which support free competition. As a consequence, local companies must become ‘the step-children’ when it comes to exploiting the resources”.
Although Indonesia will remain a strong destination for trade and investment, this return of paternalist economic decision-making will increase risks and may require work-around behavior on the part of foreign firms, similar to what was common in previous eras.
(These opinions are solely those of the writer and do not necessarily express those of the members of the American Indonesian Chamber of Commerce)
Political Parties
For many years I have been a member of Columbia University’s
Southeast Asia seminar, a fantastic group of scholars, writers, and a few
private sector representatives. We
recently hosted a young scholar from the Australian National University, Marcus
Mietzner, who has lived in Indonesia and closely follows the development of
political parties. Mietzner is very
concerned that although political parties have begun to mature, they still have
a long way to go to operate as full representatives of the aspirations of their
members. Compared to other emerging
democracies, Indonesia’s is doing fairly well.
Surveys indicate that people are still very confident of democracy as
the their form of government, and as might be expected, since 1998, less
identify with a political party. Voter
turnouts remain high, above 70%, but Islam has become a dividing line among
parties and within parties. Parties
differ in how strong a role Islam should play in public life.
The most pressing issue for Indonesia, according Mietzner,
is party financing. Up until 2005, the
Indonesian government still appropriated funds to help parties with organizing
their infrastructure for the large increase in the number of local direct
elections.
Since then, the government has severely cut its support, and parties are
now plagued by the outsized influence of wealthy patrons or the corruption of
party leaders steering projects or government funds to party campaign
funds. President Yudhoyono is thought
to have agreed to reinstate the party subsidy program but because his own party
would be a leading beneficiary he backed away from the plan.
The Next President of Indonesia ?
Mietzner asked a question that many Indonesians have been
asking me recently: Is the US ready for Prabowo (a former top general and son-in-law of Suharto) as Indonesia’s next President
? Prabowo tops most polls with 20% of
the vote and is considered decisive and disciplined, the type of President many
Indonesians say they would like. But
although his countrymen may overlook allegations of human rights abuses when he
was an Army commander, US leaders in Congress may not. Some have told me that he may be on a “do
not enter” list.
Indonesia’s first civilian Minister of Defense,
Dr. Juwono Sudarsono, told Stanley Weiss, the head of Business Executives for
National Security that "Prabowo
leads the pack because he projects grit, firm leadership and
decisiveness--which are seen to be lacking in our current
leadership." In a September 2012
Huffington Post piece, Weiss recalls a conversation at the White House with
General Wayne Downing, a top counter-terrorism official in the Bush
Administration and a long time instructor of foreign soldiers at Fort Bragg who
said “Of all the foreign soldiers he ever trained, two stood out. One was
Abdullah II bin Al-Hussein, the reigning King of Jordan. The other was Prabowo
Subianto."
There is a long way to go until the Presidential elections
next year. First the country must go
through Parliamentary elections. From
those numbers, it will be clear which parties can nominate candidates. The current system is that a political party
must have members and offices in all Indonesia’s provinces and achieve a certain threshold
of seats in Parliament to nominate a Presidential candidate. It is unlikely that Prabowo’s party, Gerindra, can
nominate him on his own and they are seeking alliances with other larger
parties. Also, the slump in party
identification among voters always leaves room for a “dark horse”
candidate. Even more popular than
Prabowo in some current polls is the Governor of Jakarta, Jokowi, who is not
currently a declared candidate. Others
will no doubt come forward in the months ahead.
For Mietzner and the legions of political observers of Indonesia,
2013-2014 will be a busy year.
Indonesia heads into 2013 with continuing questions for foreign companies within an overall atmosphere of solid 6% -6.5% economic growth. The blemishes --if handled well--will not take away from the rosy complexion. Those looking for stimulative reforms that would smooth the path for foreign companies may have to wait until the next Administration or look to innovative regional leaders. It would be nice to be wrong here. But, lets be clear, Indonesia remains in a solid position for long term growth.
Extractive
Although resource nationalism remains a concern and ambivalence towards the role of foreign companies continues to hamper needed investments, the economy is likely to pick up steam as growth returns to Indonesia’s export markets following the 2008-2010 period of de-leveraging. We already see some retreating on the export ban for minerals but settling the contract renewals of key investments such as the Mahakam oil and gas project (Total) and Freeport’s Grasberg mine may be further delayed and await the change of leadership in 2014. The unfortunate truth is that the ruling coalition, led by President SBY’s Partai Demokrat, may have difficulty sticking its neck out for foreign investors because to do so may make them appear weak in the next election cycle. Of course, renewing contracts as early as possible will always lead to more investment and faster growth. But as we near 2014 many decisions of the current Administration have a political overlay and require more calculation. Wouldn’t it be great to just hit the “clear” button.
Consumer
The consumer sector is humming along and there should be little let up here. Confidence is up and investment to serve this sector has blossomed and will continue. Infrastructure and logistics remain a stumbling block and recent rises in minimum wages is a pressure many local businesses will have a hard time implementing. Inflation, steady throughout 2012, is likely to increase. On the other hand, the government has not backed changes to fuel subsidies (electricity rates may head up) and --even if it wanted to-- may not be able to get the votes in a fragmented Parliament. In Indonesia fuel rates are like taxes in the US.
Infrastructure
Indonesia will make another push for infrastructure investment centered around an event in November when the country hosts APEC. But, any strong policy changes such as better land clearing procedures or creativity in financing (municipal finance) will remain for the next Administration. However, at the local level, we may see some innovations on the margins that may help alleviate the road and power gridlock. News on the effectiveness of last year’s new law on land acquisition will likely be muted. Challenges remain to translate the government’s master plan vision (MPE3I) into achievable goals by the line Ministries, may of whose talented personnel find it confusing.
Investment
We will see some of the FDI investments made in the last 2 years open in 2013. The growth story, and a predicted better balance of payments should lead to a strengthened rupiah. Indonesia will again have success in the international sovereign bond market. The nation’s credit rating may see some modifications based on concerns about some of the nationalist --dare I say protectionist-- policies. Attention to the Churchill Mining dispute --now on the agenda of the World Bank’s Court for the Settlement of Investment Disputes-- will most likely minimally affect the overall investment climate as its already been factored in by most companies.
Trade and Tourism
If China’s economy continues to recover Indonesia will see better numbers in these sectors. Signs are good. Uncertainty in government policy in the extractive sector -- where yet again officials are warning the target for oil and gas exports will not be met-- as well as ethical purchasing behavior of consumers in export markets (paper, palm oil) also inhibiting factors.
Legal
The Constitutional Court ruling of November 2012 to dissolve the oil and gas regulator BP Migas may have offspring. Those groups who believe in economic nationalism, looking to make a point with voters, may institute “copy cat” suits that could more directly seek to limit foreign ownership. In 2013 we should begin to see draft revisions to the 2001 Oil and Gas law as mandated by the November court decision. The vulnerability is the language of Article 33 or Indonesia’s constitution which states that all natural resources shall be used for the “people’s welfare”.
Political
10 political parties will meet the threshold to field candidates in the June 2014 Parliamentary elections and September 2014 Presidential elections. The corruption scandals tainting the Partai Demokrat are fueling the hopes of parties such as Golkar, whose share of votes has been declining. Towards the middle to end of 2013 we will have a better idea of the shape of these elections but even then the picture will remain incomplete as some President/VP tickets may await the results of the Parliamentary elections. With so many parties, coalition building, never a precise game in Indonesia, will be dominant, as will be the search for a candidate with star power who might feed into many Indonesians’ desire for a ratu adil, just leader. Could it be the young charismatic Governor Jakarta, Jokowi, who is sure to be tested by this week’s floods. Or what of Suharto’s son-in-law Prabowo, who remains popular in polls for his perceived strength, but is also weakened by his track record as an Army commander. Will SBY choose an heir from his own family or let the process occur more organically. 2013 may yield even more questions then answers.
Foreign/US-Indonesia Affairs
Indonesia hosts an important APEC Leader’s Summit in November in Bali (Obama is scheduled to attend), a chance to showcase its advancing position on the world stage, as well as lead the many discussion of implementing APEC free trade goals. Foreign Minister, Marty Natalegawa, will no doubt be at the center of settling or at least cooling off the South China Seas dispute, which is mostly about access to deep ocean mineral resources. President SBY is slated to return to the US in May 2013 for meetings at the UN. There could also be a bilateral with President Obama.
Security
2012 ended with Indonesia’s anti terrorism command (Detachment 88) defusing a terrorist cell in Eastern Indonesia but with activity heating up in Mali and Algeria, one cannot be complacent that Indonesia’s has completely eradicated its terrorist practitioners. The police uncovered a plot aimed at several US official facilities in 2012 and we can expect that vigilance will remain a necessity for the near term. For travelers, its generally recommended to consult US State Department websites that post alerts, warnings, and health information.
Final Comment
Short summaries are inherently marred by their incapacity to cover everything. But the above notes should give readers a flavor of whats ahead for 2013. (These comments may or may not reflect the interests of AICC members)
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