A high-profile US$6.1 billion deal for Singapore's DBS Bank to take over Bank Danamon, Indonesia's sixth-largest lender by assets, is dead, according to a formal DBS statement, a casualty of the country's rising economic nationalism.

The Singaporean bank, the largest in Southeast Asia by assets, had until Aug. 1 - tomorrow - to decide whether to go ahead with the purchase of a limited 40 percent share of Danamon instead of taking over control.

In the DBS statement,Group CEO Piyush Gupta said: "We would like to express our deepest appreciation to the regulators in Indonesia and Singapore for giving the transaction due consideration. We are positive about Indonesia's long term potential, and will continue to grow our DBS Indonesia franchise, while remaining open to opportunities as they arise. In all that we do, DBS is committed to financial discipline and shareholder value creation."

DBS agreed in April last year to buy the 67.4 percent stake in Danamon that was held by Singapore's sovereign investment fund Temasek Holdings Plc, However, the transaction was delayed following a move by Indonesian authorities to limit foreign ownership of domestic banks. If the offer had been accepted, it would have triggered a mandatory takeover offer for the remainder of the shares.

The rules, published in July 2012, limit a single bank or non-bank institution to holding no more than 40 percent of the issued share capital of an Indonesian bank, single non-financial institutions from holding more than 30 percent of the share capital, individuals 20 percent.

DBS is said to be leery of getting into an operation with an Indonesian institution without control - a prudent concern, since a long list of Indonesian banks have failed after being looted by their ownership over the past two decades. One, Bank Century, which failed in 2009, required a US$677 million bailout. Its co-owners are still on the run, having been sentenced in absentia to 15 years in jail for ripping off the bank.

"They were buying the Temasek stake and the Indonesians changed the rules on them in mid-stride," said a Jakarta source. In May, local news media quoted the Indonesia bank governor, Darmin Nasution, as saying it would only be allowed a further share beyond the 40 percent if the Singapore government allowed Indonesian banks to open more branches in the island republic. That would be a long shot at best.

According to local media, DBS responded in a statement to the Singapore Exchange saying it had not received written notice of the reciprocity offer, and that it hoped the buyout would be approved by Indonesian monetary authorities as originally submitted.

The screws have been tightening on foreign ownership of Indonesian assets - well beyond financial institutions - for more than a year, with restrictions put in place on a wide range of foreign activities, including mining exports and the renewal of oil and gas contracts held by multinationals.

This rising economic nationalism in April led Michael Punke, the US Ambassador to the World Trade Organization, to complain that "Indonesia's report highlights that it is adopting policies designed to promote domestic production, move the Indonesian economy up the value chain to a higher level of development, and achieve agriculture self-sufficiency. While elements of these objectives are understandable, we have serious concerns about the import substitution and restrictive market access policies that Indonesia is using to achieve them."

Indonesia, Punke said in his prepared statement, "has introduced and implemented a wide array of new trade and investment restrictions since its last (review). These include import licensing requirements, trading rights limitations, pre-shipment inspection requirements, foreign equity restrictions, local content and domestic manufacturing requirements, and export restrictions, including taxes and prohibitions. We are also highly concerned about Indonesia's frequent use of safeguard investigations that do not appear to meet a number of the requirements of the WTO Agreement on Safeguards. In addition, we are monitoring troubling developments related to the new Law on Food, as well as the draft Trade and Industry Laws."

Most nationalist-driven measures (particularly in agriculture and natural resources) are well along and driven by political considerations. The primary driver appears to be Hatta Rajasa, Coordinating Minister for the Economy and chairman of the National Mandate Party. He is widely assumed to be angling to replace Susilo Bambang Yudhoyono as Indonesia's president in elections due in 2014, or to become a vice presidential candidate for another presidential candidate.

"Hattanomics," a term coined for Hatta's economic ideas, is said to have taken over in the presidential palace, with protectionism, trade restrictions and the limitation of foreign capital prevailing.

Starting next year, foreign mining operations will be required to establish smelting plants to process raw materials before export. In 2013, the government also introduced an additional 20 percent tax on the export of resources including gold, nickel, copper and tin and added complications to the obtaining of export permits. Those taxes came into effect as the global commodities boom turned sour. According to one report, the nickel industry estimates that the new policies have resulted in additional costs of $676m.

The government has also ruled that after 10 years of production, multinationals may only hold 49 percent of a joint venture, handing over control to domestic mining firms, not a recipe for confidence in a country where corporate governance leaves something to be desired, as financier Nat Rothschild discovered in his dealings with the mining, communications and property empire of tycoon Aburizal Bakrie.

According to the Indonesian Trade Security Committee (KPPI), Indonesia was ranked third after India and Turkey on a list of countries that applied protectionist trade barriers, based on WTO data in 2010. Possibly out of retaliation, Indonesian products at last report faced antidumping and safeguarding measures implemented by more than 12 countries, according to the Trade Ministry. More are likely in a world in which protectionism is continuing to rise.

DBS Backs Out of Danamon Takeover

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