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'Protectionist' Indonesian Export Curbs, Taxes to Stifle FDI

Sri Jegarajah|Reporter, CNBC Asia Pacific
Thursday, 12 Apr 2012 | 1:20 AM ET

Plans by Indonesia to ban exports of some raw minerals from 2014 and impose a 25 percent export tax on coal and base metals this year will stifle foreign direct investment, hurting growth prospects in Southeast Asia's largest economy.

A money changer counts Rupiah banknotes October 17, 2002 in Jakarta, Indonesia. The rupiah is at a six month low, 9,200 against the U.S. dollar, following concerns over the bomb blast on the tourist island of Bali.
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A money changer counts Rupiah banknotes October 17, 2002 in Jakarta, Indonesia. The rupiah is at a six month low, 9,200 against the U.S. dollar, following concerns over the bomb blast on the tourist island of Bali.

"FDI has become an important component" of Indonesia's balance of payments over the last few of years, Prakriti Sofat, Regional Economist at Barclays Capital told CNBC on Thursday.

"But if we have news like this then potentially investment within the mining sector - which has been coming in very strongly from China and India - can take a breather which would not be very positive for the long-term story of the country."

Latest policy developments in the country's mining sector - which accounts for about 11 percent of growth domestic product - were also "definitely concerning especially for the equity market," Sofat said.

Foreign direct investment into Indonesia surged 20 percent to a record 175 trillion rupiah ($19.1 billion) last year, the country's Investment Coordinating Board said on January 19.

In a research note earlier this month titled 'The Intent Is Clear - The Mechanism Is Not', Deutsche Bank analysts highlighted separate mining policy mandates announced by the Indonesian government in the past year, including the decision in February to limit foreign ownership in domestic mines to 49 percent within the tenth year of the start of commercial operations, and plans revealed early April to impose a 25 percent export tax on coal and base metals in 2012, with an increase to 50 percent in 2013.

"It appears likely that the government will claim a larger share of domestic resource earnings going forward, through either higher taxes or increased ownership," Deutsche analysts Daniel Brebner, Xiao Fu and Cherie Khoeng wrote. "This could adversely impact production in the longer term if investment from foreign companies declines as a consequence."

"We view the government's rhetoric on banning metal ore exports as a signal that it is serious in its desire to force miners to invest in processing facilities within the country,” they added in the report. “Nevertheless, we don't believe that it is realistically in a position to halt exports in the near term."

'Uncertainty and Confusion'

Although Indonesia's growth prospects remained compelling, the raft of regulatory announcements on the mining sector has created "a lot of uncertainty and confusion," said James Thom, Investment Manager at Aberdeen Asset Management, Asia. "And certainly the mining companies that I've been talking to are subject to that confusion and uncertainty which from an investment perspective is clearly not helpful."

Thom added that foreign direct investment in Indonesia has been growing quite healthily and it “would be a concern to see a reversal in that trend."

Robert Prior-Wandesforde, Head of India and South East Asia Economics, Credit Suisse, agreed that Indonesia was in danger of being perceived as protectionist by foreign investors.

"These kind of measures highlight that actually Indonesia is not a completely different animal to the one that it used to be," Prior-Wandesforde said. "There are still some natural protectionists type tendencies there. This economy hasn't opened up completely."

Industry Ministry Secretary General Anshari Bukhari told Reuters in early April that he hoped introduction of an export tax will prevent a deluge of mineral and metal ore shipments, as producers ramp up ahead of a planned 2014 ban.

"We should actually impose the export tax early this year, so that the current export rush can be avoided," he said. "In 2013 we plan to increase the export tax to 50 percent."

Bukhari was unable to give an exact date for when the export tax would be introduced, but added that it would be imposed on miners' export sales, Reuters reported.

Governments Asserting Control

Government policies aimed at controlling exports or investment flows are now becoming a common theme across the region. But such regulations have often been inconsistent, badly timed or poorly communicated. That's led to a cool reception from financial markets and a backlash from domestic industry.

India's government banned exports of cotton on March 5, but relaxed it partially within a week, following political pressure, from within the ruling coalition and from Gujarat chief minister Narendra Modi, after a backlash from the nation's farmers.

Meanwhile, Taiwan's Finance Ministry told investors on March 30 not to read too much into a tax reform panel's plan to discuss a possible tax on stock investment and other capital gains, which had triggered a big fall in the stock market the previous day.

The announcement led to a 2.06 percent drop in Taiwan stocks on March 29, the biggest single-day percentage fall in over three months.

"Latest developments in Indonesia, Taiwan and India suggest that there may still be a bias for, or a preference, to controlling inflows and investment as well as generating tax revenues," said Barclays's head of FX strategy for Asia Pacific ex-Japan, Olivier Desbarres.

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