Indonesia Trade Law Worries Multinationals

American and European multinationals operating in Indonesia are growing alarmed that a draft regulatory trade and investment framework being circulated by the government will actually constrict investment and cut further into market access in a country increasingly in the grip of economic nationalists.

The draft trade law has been under consideration for more than a year. Both the American and European Chambers of Commerce, in analyses of the measure circulated among its members, expressed concern that no foreign companies have been asked for input.

Indonesia has been the focus of investor concerns over economic nationalism for months, roughly coinciding with the departure of Sri Mulyani Indrawati, the tough, globally oriented finance minister, in 2010. A dedicated exponent of free trade and globalization, Sri Mulyani was the star of President Susilo Bambang Yudhoyono's first administration but lost out in a political battle with Aburizal Bakrie, the patriarch of the Bakrie mining and property interests.

Sri Mulyani left Indonesia to return to a position with the World Bank, to be replaced influence if not in name by Hatta Rajasa, the coordinating minister for Economic Affairs and head of the moderate Islamic National Mandate Party. He is a presumed candidate to succeed Yudhoyono as president and his views on globalization appear to be diametrically opposed to hers.

The worsening investment climate from growing nationalism is very much of a part of the 2014 presidential race. Billions of dollars in investment by foreign companies including mining and oil concerns are being held to ransom. Freeport McMoRan, the Colorado-based mining giant, reportedly has US$12 billion in investment in Indonesian operations stalled. Other oil and mining operations have as much as US$50 billion held up waiting to be invested.

The question is whether eventually this misguided economic policy will start to bite. The economy is running a deepening fiscal deficit, has moved into a persistent trade deficit and stubbornly increasing unit labor costs. Its currency has depreciated steadily against the US dollar on the country's fourth monthly trade deficit in January. Government bonds dropped as February inflation beat analysts' estimates. So far, however, international investors have not been deterred, with foreign direct investment rising in the third quarter of last year from a low of US$4.2 billion in the second quarter to US$4.7 billion quarter on quarter.

The Rupiah Descends

Source: XC Currency Charts

The American Chamber in Indonesia studied the draft document and submitted comments, but received no answer, according to the Amcham analysis.

"One concern is the lack of foreign stakeholder input in the initial draft. Both the Indonesian Chamber of Commerce and Industry (Kadin) and (the Indonesian Employers Association) engage in frequent dialogue with foreign businesses, but there remains the worry that a lack of direct input into such proposals means that the views of domestic business associations will trump those of foreign ones," the American Chamber analysis said. "This sentiment could discourage billions of dollars in foreign direct investment that the country needs to achieve its long-term economic growth goals."

The European Chamber expressed similar concerns, saying that while the law aims to complete and harmonize the current available regulatory trade framework, "there is a concern that the current draft of the trade law would allow a wide interpretation by the government on trade related issues, adding uncertainties to traders and industry."

US companies operating in Indonesia are concerned that the draft would allow for a loose interpretation of trade-related issues, adding uncertainty to the business environment.

"The biggest concern is that if the bill is passed in its current form, it will set up a legal justification for the politicization of trade," the Amcham report said.

Similarly, the most significant concern, the European chamber said, is that the law would give the government language to take measures based on subjective assessments to allow for rising protectionism. In general, the European Chamber assessment said, "the law is rather vague and adds additional uncertainties to traders as well as companies active in Indonesia."

The European Chamber, for instance, cited a paragraph in Article 6, which gives the government authorization to "stipulate restriction or prohibition for goods and services trade: a. to protect the state; b. to protect the morals of the community; c. to protect health, safety, and security of the community is needed, as well as for the environment, living animals and plants; d. the protection against excessive consumption of natural resources, to produce and consume is required; e. to maintain the payment balance of international trade" - in other words, to limit investment or trade under almost any situation.

International investors in Indonesia, particularly in mining and energy extraction, have come under increasing pressure for more than a year, with industry insiders saying it appears the government, made complacent by several years of rising gross domestic product and healthy investment, intends to freeze foreigners out of ownership and turn them into contract operators of assets rather than owners.

The result has been a steady drumbeat of laws, regulations and court decisions that have cut steadily away at autonomy for the multinationals despite long-running contracts of work. Several major corporations are facing contract negotiations with trepidation.

Just two weeks ago, the French-owned Total and the US-owned Chevron publicly objected to a central bank rule requiring exporters to channel all their earnings through local banks, saying the rule could have a negative impact on future investment in the country and that it violates existing production sharing contracts. Before that, after a Constitutional Court wiped out BP Migas, the country's upstream oil and gas regulator, the body that replaced it in effect ordered the ouster of Richard J. Owen, the chief executive of ExxonMobile Indonesia, over refusal by the US oil giant to divest itself of gas fields coveted by Indonesian companies.