Open for business investing in indonesias new era

Preface 1Author biographies 2 Reform or conform: Indonesia’s political landscape 3 Jack Hewson, contributing editor, The Economist Intelligence Unit Promoting policy certainty, unlocki

Preface 1

Author biographies 2

Reform or conform: Indonesia’s political landscape 3

Jack Hewson, contributing editor, The Economist Intelligence Unit

Promoting policy certainty, unlocking investment potential 7

Wijayanto Samirin, co-founder and managing director of Paramadina Public

Policy Institute, and economic advisor to Vice President Jusuf Kalla

Regulation and economic nationalism in Indonesia: The investment impact 13

Keith Loveard, senior analyst, Concord Consulting

Indonesia’s logistics services sector: The key to boosting growth potential 17

Josephine Bassinette, manager, operations and portfolio, World Bank Indonesia

Moving up the value chain: the rise of Indonesian manufacturing 23

Destry Damayanti, executive director, Mandiri Institute

Working towards a sustainable future for Indonesia’s rural economy 27

Steve Rhee, programme officer, natural resources, Ford Foundation

Contents

1 © The Economist Intelligence Unit Limited 2015

Preface

Saying a country has entered a new era after an election is a familiar conceit

However, Indonesia has earned it

President Joko Widodo, known locally as Jokowi, was elected in 2014 and represents

a break for the world’s fourth-most populous country from years of being run by political elite Even before taking presidential office,

he had won national popularity for his hands-on approach as governor of Jakarta, community walkabouts and humble origins

Before his political career, Jokowi, the son

of a timber collector, sold furniture

He also represents the political outsider who brings new perspective to Indonesia’s nagging issues that overshadow its budding promise

Woeful infrastructure, deeply embedded political corruption and growing wealth inequality are long-running problems that compounded the challenge of slowing growth and falling commodity prices in 2014

The Economist Intelligence Unit (EIU) expects GDP growth to average 6.1% a year in 2015-19, compared with growth of around 5% in 2014

The rebound will come from an improvement

in the business environment stemming from structural reforms initiated by Jokowi’s administration In addition, as Indonesia becomes better integrated into global supply chains, its manufacturing sector can grow and boost exports

At the November 2014 APEC CEO summit in Beijing, Jokowi closed his formal address by saying: “We are waiting for you to come to Indonesia We are waiting for you to invest

in Indonesia.” This report is focused on the opportunities and challenges of investing

in the country, and the EIU asked experts from research, industry and academia on how long South-east Asia’s largest economy may have to wait

Shell commissioned this project but had no editorial input into the report, which is solely the work of the authors The editors of this report were Kevin Plumberg and Jack Hewson from the EIU n

Jack Hewson has produced video and written

reports for a range of media organisations

including The Economist Group, Al Jazeera

English, the Guardian, and FRANCE 24, since

first reporting on Indonesia in 2011 He holds

a bachelors in politics and philosophy from

the University of Manchester and a masters

in investigative journalism from City

University London

Wijayanto Samirin is the vice rector of

Paramadina University, and is also the

co-founder and managing director of

Paramadina Public Policy Institute Before

joining Paramadina in 2007, he worked in

investment banking and the hedge fund

industry for ten years Recently, he was

appointed as expert staff to Jusuf Kalla,

Vice President of Indonesia Mr Wijayanto,

a Fulbright scholar, has published four

books and more than 100 columns in

national as well as international media

Keith Loveard has been reporting on

Indonesia since 1990 After a career in

journalism in Australia, he became the

Jakarta correspondent for Hong Kong-based

Asiaweek magazine in 1990 He worked for

the Indonesian government as an advisor on

public affairs to the Ministry of Industry and

Trade in the Megawati administration and

for many years was a guest lecturer on media

management at the Ministry of Foreign Affairs

Following the change of government in 2004,

Mr Loveard joined Concord Consulting, where

he is senior risk analyst

Josephine Bassinette has been the manager

of operations and portfolio for the World Bank

in Indonesia since 2012 Prior to coming to Indonesia, she has had a long career in the World Bank Group including in Afghanistan, China and Mongolia, and many years in the Middle East region including projects associated with the challenges of trade and logistics between the West Bank and Gaza and its neighbours

Destry Damayanti has spent more than eight

years with Mandiri Group as a chief economist In May 2014 she was also appointed as the executive director for the Mandiri Institute, an independent think-tank founded by Bank Mandiri She was also recently assigned as chair of the Economic Task Force at the Ministry of State Owned Enterprises which reports directly to the minister Before joining Mandiri Group she worked at Citibank, the British Embassy, and the Ministry of Finance

Steve Rhee has held research and policy posts

at several institutions, including the Center for International Forestry Research (CIFOR) and the US Department of State He has worked on natural resource governance in Indonesia since 1996 and has also worked in mainland South-east Asia, Timor-Leste and Nepal

Mr Rhee has received broad recognition for his evidence-based policy work, including being selected as a Fulbright Scholar, a US National Science Foundation grant recipient,

a postdoctoral fellow at Harvard and Columbia Universities, and the American Association for the Advancement of Science’s (AAAS) Science

& Technology Policy Fellowship n

Author biographies

3 © The Economist Intelligence Unit Limited 2015

Reform or conform:

Indonesia’s political landscape

Jack Hewson, contributing editor, the Economist Intelligence Unit

1

This may pose challenges for Mr Aldi right now, but in the long term it’s good news for Indonesia The archipelago nation needs massive investment

to continue the almost 6% average GDP growth rate it has experienced over the past decade The government estimated that the 2014 fuel subsidy cut would save 120trn rupiah (US$9.6bn)that could be redirected into infrastructure spending and government services This is a good start, but Jokowi has said US$500bn of investment will be needed—mainly from the private sector—to achieve his target of 7%

Jokowi himself will need to clarify his position on

“resource nationalism” through his handling of the unprocessed mineral ore export ban, which was upheld by the constitutional court in December

2014 The imposition of punitive taxes on the export of Type 1 minerals, like copper, iron ore and lead, has been successful in forcing foreign miners

to commit to build smelting facilities But the more stringent criteria for miners of Type 2 minerals, like

Aldi Pradono sits on a beat up sofa waiting

for his next fare on Jalan Bangka Raya,

a busy street in south Jakarta Working as a motorbike taxi driver he must pay for his own bensin, or gasoline Despite a 30% fuel subsidy cut in November 2014, a policy of new President Joko Widodo, most of his old customers still want the old fares “I only made three million rupiah (US$235) a month before the price went

up, so it’s harder for me,” he said “But, yes, I’m still glad I voted for Jokowi, we’re proud

of him here.”

The ability of Jokowi to implement unpopular subsidy reform is a measure of the current strength of his political capital But it may also be

an early indicator of his apparent willingness to prioritise economic sense over approval ratings

1 Moestafa, Berni; Chatterjee, Neil and Mathieson, Rosalind “Widodo targets Indonesian growth unseen since Asia crisis.”

nickel, bauxite and tin, appears too demanding to

be met and seem likely to result in little benefit for

either Indonesia or the mining industry as exports

decline and workers are laid off

Despite the mineral ore export ban’s lack of

nuance, carrots and sticks will be needed to

guide Indonesia’s industries up the value chain

As global commodity prices fall, Indonesia can

no longer rely as much on its resource extraction

industries to drive GDP growth Moreover,

Indonesia’s weak position in global supply

chains does not help its current account

imbalance, as high-value imports flood in to

feed a domestic consumption boom With an

additional 90m Indonesians expected to join the

consumer class by 2030, reviving Indonesia’s

manufacturing sector must be a priority for the

incoming government.2

Widening gap

Despite these bright economic forecasts, the

divide between Indonesia’s rich and poor

is widening Between 2003 and 2010, the

consumption of the richest 20% of Indonesians

grew by 6%, but for the poorest 40% of

households, it grew by only 1% This inequality

is particularly pronounced in rural areas and Indonesia’s more remote eastern provinces where rural transportation infrastructure is hazardous and electrification ratios are as low as 30% Access to healthcare and education can also

be limited, of very poor quality, or non-existent

The over-development of industries, like coal mining, palm oil and pulp and paper, is also the main driver of Indonesia’s prolific carbon dioxide emissions, and is damaging rural communities—

many of which have not benefitted from the resource-extraction and agribusiness boom

Pushing his reforms through parliament may pose significant challenges for Jokowi While his “everyman appeal” has earned the support

of Mr Aldi and millions like him, this popularity

2 Budiman, Arief; Chhor, Heang; Razdan, Rohit and Sohoni, Ajay “The new Indonesian consumer.” McKinsey&Company, December 2012

2013

2012 2011

Mind the gap

Current account balance, % of GDP

Source: EIU

Despite bright economic forecasts, the divide between Indonesia’s rich and poor is widening

5 © The Economist Intelligence Unit Limited 2015

For example, he has been able to cut subsidy funding without the approval of parliament However, proactively diverting the funds into infrastructure will require

a revision of the 2015 state budget, and

he will not be able to do that without parliamentary approval

is not reflected in the House of Representatives (DPR) where he is opposed by the Red and White Coalition (KMP), loyal to losing presidential candidate Prabowo Subianto, a former special forces commander and head of the Gerindra Party The KMP is backed by Golkar, the former political wing of the military and Indonesia’s second largest party, which is regarded as a vehicle for Indonesia’s old political elites

Much of Indonesia’s establishment view Jokowi, who has campaigned on an anti-graft platform, as a threat to their supremacy

The Democrat Party (PD), led by former President

Susilo Bambang Yudhoyono, is considered

the most likely organisaion that could be

persuaded to leave the KMP over its opposition

to a controversial bill to abolish direct regional

elections However, it is unlikely that KMP

opposition will be uniform and the nuances of

getting other legislation passed are likely to be

complex and varied, depending on the content

of the legislation

Jokowi has a clear vision for Indonesia’s

economic expansion over the next five

years, but it remains unclear if this vision

can be implemented n

7 © The Economist Intelligence Unit Limited 2015

Promoting policy certainty, unlocking investment potential

Wijayanto Samirin, co-founder and managing director of Paramadina Public Policy Institute, and economic advisor to Indonesia’s Vice President Jusuf Kalla

2

attract global investment and to allow its economy to flourish

Unlocking Indonesia’s potential

Home to about 40% of South-east Asia’s population, land mass and economic capacity, Indonesia is a country with huge economic potential But there is a disparity between potential and reality For example, despite huge foreign direct investment growth over the past decade, Indonesia’s FDI to GDP ratio

is still only 2.6%, half that of Vietnam Investment faces three main obstacles: policy uncertainty, infrastructure reliability and quality of human capital 3

Improving human capital and infrastructure will take time and will require mid- to long-term

Indonesia Thailand Malaysia Vietnam Philippines

Inward FDI, in USDbn (2013) Inward FDI/GDP (2013)

23.0

12.9 12.3 8.9 3.8

2.6%

3.3%

3.9%

5.2% 1.4%

Millions of spectators from all over

the world—including thousands of Indonesians, who stayed up until the early hours—tuned in to watch the Spanish football league’s premier fixture in October 2014

The match, also known as El Clasico, is the faceoff between La Liga’s two greatest teams:

Real Madrid and Barcelona Like the British Premier League, or the German Bundesliga,

La Liga is a multi-billion dollar enterprise—

with millions of viewers drawn in by the quality of the football And one reason why

La Liga generates such skilled playing is because its referees stringently enforce the rules of the game The world of investment is not so different and just like La Liga, Indonesia needs clear and fair rules to

Inward FDI

South-east Asian economies, 2013

3 Ernst & Young Indonesia, Gadjah Mada University and Paramadina Public Policy Institute “Partners in Prosperity: The Impact of US Foreign Direct Investment on the Indonesian Economy.” AmCham Indonesia, 2013.

Source: UNCTAD, Indonesia Investment Coordinating Board

solutions, but improving policy could have an

immediate impact and should be a top priority

for the current administration Businesses

can navigate fluctuating currency and high

inflation by hedging currencies and sharing

the impact of rising costs with consumers

However, companies are powerless in the face

of policy uncertainty

Fortunately improving policy is not expensive—

which is convenient as the government faces

a challenging fiscal situation—and will lead

to solutions in all other areas, including

infrastructure and human capital

Lack of policy applicability

Many issues can create policy uncertainty

One of the most troublesome in Indonesia

is the lack of policy applicability, which can

create unnecessary costs and limit the

opportunity for the private sector to tap

business opportunities

For example, Government Regulation No.82 of

2012 on Implementation of Electronic Systems

and Transactions (GR 82) mandates Indonesian

businesses conducting electronic transactions

provide a public service and must set up localised data centres in Indonesia.4 Yet, the law has created confusion as it does not define what public service means

GR 82 requires every electronic system provider operating in Indonesia to be registered and have

a data centre in the country This requirement aims to help the government locate and control data within Indonesia’s sovereign territory and protect against cyber-crime But it is expensive and inconvenient for information and communications technology companies to meet this requirement, and it also has an impact on the banking and insurance sectors

Policy cycle

Issue emergence Agenda Setting Policy Formulation

Policy Evaluation & Review Policy Implementation Policy Adoption /

Enactment

Proper policy process

4 Government Regulation No 82 of 2012 is the implementation guideline from Law No 11 of 2008 concerning Electronic Information and Transactions.

To avoid the enactment of poorly thought-out legislation there needs to be more consultation between business

and government

9 © The Economist Intelligence Unit Limited 2015

policies, and their input and insights are valuable In fact, according to Indonesian law, the business community and broader society are entitled to oral or written input in the discussion and formulation of draft laws and regulations.5

Business must take a more active role in the policy cycle by:

n Setting the policy agenda—through public discourse or regular dialogue with policy makers

—to ensure that the concerns of the business community become government priorities;

n Participating in the formulation of policy by collaborating with think-tanks or universities

to prepare evidence-based recommendations for the government;

n Reviewing policy to give input to the government on potential improvements based on industry changes

Foreign ownership

Policy on foreign ownership has been a recurrent issue in the Reformasi period, and public sentiment towards foreign companies

One major issue with GR 82 is the availability

of a reliable power supply, with the sole provider being state-owned electricity company Perusahaan Listrik Negara (PLN) Even in Java, where the capital is located, power outages are common and many e-commerce businesses will be reluctant to rely on PLN as their sole source of electricity This is bad news for small- and medium-sized technology firms that will be unable to afford their own data-centre, let alone a distributed power solution to protect it against outages Renting space from a domestic data-provider would also create additional costs Furthermore, cloud computing is being increasingly adopted around the world because of the efficiency

it offers, and GR 82 will put Indonesian companies at a disadvantage

To avoid the enactment of poorly thought-out legislation there needs to be more consultation between business and government Ideally, the government should engage the business community in the policy-making process, and the business community should proactively seek dialogue with government Ultimately, businesses are a part of implementing these

Mining, oil & gas Agriculture & forestry Manufacturing Telecommunications Electricity

Banking Insurance Transportation Average

Indonesia

98 72 69 57 95 99 80 49 77

Malaysia

70 85 100 40 30 49 49 100 65

Philippines

40 40 75 40 66 60 100 40 58

Thailand

49 49 87 49 49 49 49 49 54

Vietnam

50 100 75 50 71 65 100 69 73

Maximum foreign ownership limits, %

Source: World Bank, 2010

5 Law No 10 of 2004 concerning the Establishment of Legislation, article 53

swings back and forth from negative to positive

Politicians often drum up support prior to

legislative and presidential elections

by pandering to nationalist sentiment

Periodically, the House of Representatives

(DPR) has come close to placing restrictions

on foreign ownership of companies in various

sectors in recent years But despite these

periodic threats, Indonesia is more open relative

to its peers in the region Ideally, limits on

foreign ownership will need to be at a level that

makes investing in Indonesia still attractive

to foreign companies Policy adjustment must

be managed and executed properly, under fair

business practices and in a realistic timeframe,

to avoid deterring investment

Regulation

Lack of harmony in the regulatory landscape has

become a serious issue since the decentralisation

“big-bang” in 2001 Within one year more

than 500 sub-national governments became

autonomous with the authority to collect

revenues, formulate budgets, implement development plans and issue regulations.6 But problems have arisen as national and sub-national regulations have come into conflict, with the latter often-lacking coherence

Paramadina Public Policy Institute’s new study,

“Indonesia’s New Path: Promoting Investment, Nurturing Prosperity”, illustrates how companies operating across Indonesia have to comply with different local regulation in hundreds of districts

The complexities and costs are enormous

6 Investing Across Borders, World Bank 2010 Excluding media industry

Politicians often drum

up support prior to legislative and presidential elections by pandering to nationalist sentiment

11 © The Economist Intelligence Unit Limited 2015

and consequently may not align with each other, creating unnecessary complexity, costs and business uncertainty Empowering MoHA should become a top priority of the government

The next five years

The administration of President Joko Widodo must address a faltering economy due to declining global commodity prices Commodities and commodity-related products represent around 40% of Indonesia’s exports and play an important role in the domestic economy; as a result economic growth has slowed from 6.4% in

2011 to around 5% in 2014 The government’s budget is targeting growth of 5.8% in 2015 and 7% or higher by 2019.9 Meeting these targets will be a challenge, and the Paramadina Public Policy Institute estimates that it will require investment of around US$290bn Without massive private sector contribution this will not be achieved

Fortunately, the administration is aware of this situation and is showing its commitment to improve the business environment in Indonesia

by reducing red tape, improving infrastructure and simplifying the business approval process.10

It is very likely that during the first year of their term they will make various strategic policy reforms to take advantage of Jokowi’s strong political capital The recent fuel price increase has proven his willingness to implement unpopular but important policies for the country.11

Good times create bad policy and bad times create good policy—and now Indonesia has the perfect combination.12 I anticipate a long

Another obstacle to investment opportunities

is national infrastructure development Each district has its own local government regulation regarding land use planning (RUTR) that may not be in line with national development plans

In instances when the central government has tried to implement an infrastructure project, such as a power plant, port or toll road, the plans have often conflicted with the local RUTR

Unfortunately, RUTR adjustment requires the approval of the given sub-national legislature

This involves a political process that is often lengthy, complicated and expensive MP3EI, former President Susilo Bambang Yudhoyono’s programme to speed up infrastructure

development, has experienced serious delays with many attributable to RUTR issues.7

The Ministry of Home Affairs (MoHA) has the authority to review sub-national government regulations However, MoHA has a limited capacity and mountains of regulations to review

It is estimated that each year around 5,000 sub-national regulations are issued.8 Adding to the problem is a rule by which local regulations become effective if there is no comment from the MoHA within 60 days This means that many local regulations become law without proper review

11 Kamis “Bakal Naikkan Harga BBM Jokowi Siap Tak.Populer.” Kompas.com, 28th August, 2014.

10 President Joko Widodo statement at APINDO (Indonesian Employers Association) roadmap launch, September 2014.

9 5.8% is the minimum number to absorb young Indonesians who enter the job market every year.

12 Samirin, Wijayanto Bridging the Gap: Mengurangi Ketimpangan, Meluruskan Esensi Pembangunan Gramedia Pustaka Utama, October, 2014.

Policy reform will be key to ensuring standardised sets

of rules make business in Indonesia fair and profitable

7 http://bappenas.go.id/berita-dan-siaran-pers/wakil-menteri-ppnwakil-kepala-bappenas-optimis-pemerintah-baru-lanjutkan-mp3ei

8 Paramadina Public Policy Institute (PPPI) estimate

list of policy reforms over the next five years,

particularly in priority areas like energy and food

security, taxation and investment

Right now Indonesia must make some tough

decisions and the next five years is a period

of make or break Policy reform will be key

to ensuring standardised sets of rules make

business in Indonesia fair and profitable The

Middle East economies of the United Arab

Emirates and Qatar are far more economically

vibrant than other countries in the region

because they have observed this lesson The

initial signs are that the current administration

understands this too, and will seek to level the

playing field to attract more investors n

13 © The Economist Intelligence Unit Limited 2015

Regulation and economic nationalism in Indonesia: The investment impact

Keith Loveard, senior analyst, Concord Consulting

3

Widodo, may adopt a more welcoming approach

to outside interests Addressing the APEC CEO Summit in Beijing in November 2014, Jokowi declared to the world that “Indonesia is open for business” and promised a new law on land acquisition, less red tape, and a “one-stop shop” for investment and business approvals

These are encouraging signs, but the likelihood is that pressures to maximise returns for Indonesian companies—and the elites that run them—will continue For example, state energy company Pertamina has been seemingly successful at wresting the Mahakam gas block from France’s Total and Japan’s Inpex, who had faced years of uncertainty over whether or not their contract would be renewed in 2017 The Mahakam block was originally signed to Total in 1967 and was extended in 1997 for a 20-year period in partnership with Inpex The partners have been investing US$2.5bn per year to maintain production at 1.7bn cubic feet of natural gas and 69,000 barrels of condensate per day Naturally, Total and Inpex had been hoping to see a return

on that investment

However, a senior official with the Ministry

of Energy and Mineral Resources, Widhyawan Prawiraatmadja, said in November 2014 that Pertamina would be the block’s next operator Total has been invited to stay on

On January 15th 1998, during the height of

the Asian financial crisis, former President Suharto signed an agreement to bail-out Indonesia’s nose-diving economy The bail-out, which yielded government power over economic policy to the IMF, was a disaster GDP contracted

by 13% that year and a sell-off of assets to foreign interests, including most of the nation’s banks, seemed to many Indonesians to be nothing less than the return of colonialism

The iconic image of Michel Camdessus, IMF managing director at the time, his arms folded, standing imperiously over Mr Suharto as he signed Indonesia into austerity, would become

a galvanising cause for the country’s economic nationalists over the following decade

In recent years, particularly during the run

up to the 2014 elections, nationalist tirades

by politicians, such as failed presidential candidate Prabowo Subianto, have whipped up anti-foreigner sentiment Many of the claims are focused on the country’s natural resources being stripped without Indonesia receiving a decent return Media controlled by Mr Prabowo’s supporters have pushed this line, and even well-respected outlets like Kompas newspaper have engaged in foreigner-bashing

Encouraging signs?

However, the administration of President Joko

as a minority shareholder, partly in order to

show Pertamina the ropes

Nationalist elites winning out over foreign

interests—particularly over expiring production

sharing contracts—is likely to persist, but will

need to be moderated if Jokowi’s administration

wants to achieve its stated goal of at least 7%

annual GDP growth by 2019 This will not be

achieved without outside assistance: Jokowi said

in an interview with the Wall Street Journal in

December 2014 that Indonesia will need close to

US$500bn in investment during his term in office

Meanwhile, the state budget for 2015 allocates

only US$11.4bn for infrastructure investment

Nationalism is beyond

Indonesia’s means

Despite Indonesia’s need to attract foreign

capital, the financial sector has in recent years

become a target for those who see the current

high level of foreign ownership as unreasonable

The Indonesian parliament that finished its

term at the end of September 2014 threatened

to pass a banking bill that would have required

all foreign-owned banks to divest all but 40% of

their holdings to domestic interests

This bill did not pass but the DPR then tried

to include an immediate cap on foreign ownership in local insurance firms in a September 2014 insurance law While legislators again drew back from a step that would have starved the growing industry

of funds, they left the way open for tougher limits to be set in coming years

Indonesia’s relative shortage of capital has made such nationalist policies impossible to implement The Indonesian Bank Restructuring Agency sold so many banks in the wake of the

1998 meltdown that it would be impossible to find capital on the local market to pay off foreign shareholders A failed takeover bid in 2012 by Singapore’s DBS for Indonesia’s Bank Danamon was valued at more than US$7bn Of the top ten banks by assets, five have significant foreign ownership At the end of the third quarter of

2014, those five banks had combined assets of 925trn rupiah (US$77bn) In the life insurance industry, the ten largest firms by premiums are dominated by joint ventures backed by multinational firms and, as with the banks, the capital does not exist to buy out the foreign shares, let alone finance expansion The bill for divestment to local entities is thus beyond Indonesia’s means

In banking – an industry in which Indonesia needs outside investment to grow – nationalist economic policies appear self-defeating But

in industries where the outside world needs Indonesia, such as minerals and rare earths, this has not been so clearly the case

The mineral ore export ban

The mineral ore export ban, now a punitive tax, has led the government into tough negotiations

Nationalist elites winning

out over foreign interests—

particularly over expiring

production sharing contracts

—is likely to persist.

15 © The Economist Intelligence Unit Limited 2015

Indonesia’s leverage is less powerful in copper, but it refused to budge with miners Freeport McMoRan and Newmont After being forced

to stop production because of the export ban, Newmont threatened to take its case to international arbitration, but then had to back down when the government threatened to revoke its license Despite protestations that the government has walked roughshod over contracts, both companies have had to commit

to funding smelters

The new regulations have been criticised for being too tough—particularly for miners of Type 2 minerals—resulting in closures and lost tax revenues But Indonesia can boast that it has broken the grip of regional rivals, primarily Japan and China, on Asia’s mineral processing industry Jokowi has said he will not be reversing the mining policy, though

he may ease some restrictions In any case, hopefully his partial acceptance of this nationalist policy will be the exception and not the rule

The new administration’s policy direction

Fauzi Ichsan, an economist at Standard Chartered Bank Indonesia, told Malaysia’s Star news in November 2014 that the country cannot afford economic nationalism He said that the government will need credit growth

of approximately 30% each year to realise Jokowi’s growth target, meaning that Indonesia’s banking capital must double every five years “If local capital is not adequate

to recapitalise the banking system, then Indonesia must be open to foreign capital in order to support the economic growth he has promised, ” he said

with miners The government insists that ore is processed within the country

Companies that do not commit to building smelters are being hit with dizzying export taxes that will rise from 25% to as high as 65%

by 2016 Miners of Type 1 minerals like copper, iron ore and lead are being permitted to continue to export unprocessed ore once they make a commitment to build processing facilities, but no such luxury has been granted

to miners of Type 2 minerals such as nickel, bauxite and tin The government is also introducing less favourable terms of contracts for new mining licenses

However, Indonesia is so important to international mineral supply chains that foreign miners have little option but to comply

UBS noted in an October 15th 2014 report that bauxite prices have rallied 30%-40%, to US$70

a tonne, since the export restrictions Also in October 2014, Melbourne-based Alumina warned that the ban on bauxite exports could cause a supply shortage of 10m to 15m tonnes

in China, while Citigroup said the global bauxite market will swing to a deficit of about 6.3m tonnes in 2014, from a surplus of 49.3m tonnes

a year earlier

Jokowi appears keen to attract

foreign investment,

as long as it provides benefits for Indonesia