Newly installed Indonesian President Joko Widodo has made a sharp turn from his predecessor’s restrictive investment policy, telling business leaders at the Asia-Pacific Economic Cooperation CEO summit in Beijing Monday that his country needs international investment and throwing open the doors to them.
It probably isn’t going to be that easy, with considerable vested interests standing behind the previous economic nationalism that characterized the government of former President Susilo Bambang Yudhoyono. For the past two years, particularly under the tutelage of Yudhoyono’s economics czar Hatta Rajasa, Indonesia has turned away foreign investment in infrastructure and made it difficult for the country’s extractive industries to do business. That has resulted in resource crises in China and Japan, where the shutdown on nickel imports has hampered the steel industry.
At the Beijing conference, Jokowi, as he is known, wore a business suit instead of his trademark short-sleeved shirt, spoke in English and showed slides in his appeal to investors, saying that land acquisition procedures would be streamlined and that a national one-stop service for business permits is in place to facilitate investment.
“On behalf of the Indonesian government and the people of Indonesia I would like to thank you for your listening to my presentation,” he said. “We are waiting for you to come to Indonesia. We are waiting for you to invest in Indonesia.”
That is a far cry from the previous situation, where in the first open manifestation of economic nationalism, the Indonesian government in January of 2012 in abruptly canceled a tender for a US$1.3 billion new container terminal in North Jakarta to modernize the rickety Tanjung Priok port, turning to local investors to handle the construction. From that point forward, it became increasingly clear that government leaders were demanding domestic ownership of a wide range of investments.
That was fine while the country was taking advantage of a rising economic outlook. But falling global commodity prices have hit hard, with Indonesia’s traditional trade surplus vanishing, falling into deficit in 2012 and 2013 as prices for its main exports – coal, crude, natural gas and palm oil eroded. A mineral exports ban aimed at fostering the domestic smelter industry has also played havoc with exports, particularly to China. The current account deficit is forecast to widen further.
The economy, which throughout the early part of the global economic downturn had cruised along at a 6.5 percent clip, eclipsing its Southeast Asian neighbors, has drifted down to closer to 5 percent and appears headed lower yet as global prices have slumped dramatically from US$125 per barrel to US$82 for benchmark Brent crude this week.
Although a dynamic middle income economy has been driven by consumer spending, the rupiah has gone into the tank, falling by nearly 40 percent from its high. Inflation, while easing, remains a problem, but may be exacerbated by Jokowi’s stated aim to drastically cut fuel subsidies, amounting to US$27 billion in a budget of US$167 billion, in an effort to combat the fiscal budget deficit. Efforts to cut the subsidies are encouraging from a fiscal standpoint, however, because it puts the budget on a more rational basis.
The broad policy guidelines enunciated so far by Jokowi’s economic advisers are encouraging to international investors, particularly the streamlined permit process and other changes the president mentioned in his speech. How far he will get remains to be seen. Prabowo Subianto, whom Jokowi defeated in the July general election, has been neutralized to some extent by Jokowi’s combined charm offensive and jawboning prior to the inauguration. But the House of Representatives remains hostile territory, with Prabowo’s coalition largely intact and intent on foiling his plans as much as possible.
At the same time, planners face a major dilemma in that promotion of industry and manufacturing are at the top of their list, downplaying natural resources as the key to a modern economy. However, the infrastructure is not in place to compete with others including the Thais, who have built formidable auto and electronics export industries. And, while downplaying natural resources, they need the funds that natural resource investment brings in. From the 1960s, Malaysia, Singapore, Taiwan and Thailand got in early, following Japan with export-led economies that resulted in the construction of much of that infrastructure.
“They want to tell investors what to invest in,” said a western political analyst. “But the big dollars are still in natural resources, and that’s where the investors want to be.”
In his speech to the business community, Jokowi started out by saying he had been a businessman himself before he entered politics. He announced that the government wants use the money saved from the reversal of the fuel subsidy to build 25 dams in five years to bring water to farming areas and to channel other funds into health and education. He hopes to build 24 new seaports and deep seaports, mentioning the notorious Tanjung Priok port, whose 2009 capacity of 3.6 million ton equivalent units must be increased to 15 million TEUs by 2017. He also said the country needs to vastly expand its railway network in Sumatra, Kalimantan, Sulawesi and Papua and that “this is your opportunity,” an open invitation to investment.
He described plans to build mass transit in six cities including Medan, Makassar, Semarang, Bandung and Surabaya and announced that “this is also your opportunity.” He invited investors to participate in construction of 35,000 megawatts of power to “to build our industries, projects, industrial zones, [manufacturing] zones. So we need power plants. This is also your opportunity to invest in this project.”