Commentary by Wayne Forrest

According to recent news reports underpasses in downtown Jakarta were recently flooded causing worse-than-normal gridlock.  Pumps were not checked and maintained regularly, apparently. All of Indonesia’s tsunami buoys are inoperable due to vandalism and lack of maintenance, an official from the National Disaster Mitigation Agency recently said.  The new Governor and Vice Governor of Jakarta, experienced in business and academics but not administration, have appropriated extra funds for local neighborhood leaders but rescinded the need to report on their usage.

2017 saw several common trends in both Indonesia and the US proving how interdependent our world is becoming.  In both countries the rise of populism and the growing dependence on social media over traditional media exacerbated existing divisions and negatively affected the development of coherent economic decision-making, raising risk premiums.  The issue of accountability (or lack of it) is becoming more and more important in both countries.

In 2017 President Jokowi focused on deregulation and infrastructure with some success.  Lots of rail, road, port, and power projects got underway and a few were completed.  He remains popular but was also subject to large scale demonstrations driven by social media.  But although he can be characterized as a populist style leader -its how he was elected in 2014-he hasn’t engaged in populist rhetoric as President.  Rather, his opponents have, often working through proxies.  The very professional and popular Governor of Jakarta, Ahok Punama, (Jokowi’s deputy when he had been the Jakarta governor) lost an April election to Anies Baswedan who was strongly backed by Jokowi’s chief rival, Prabowo Subianto.  An ethnic Christian Chinese, Ahok made an idle comment about Muslims not being required to vote for a Muslim that went viral and was construed as blasphemy.  For the first time in Indonesia, religion became a weapon in a political campaign that featured a well-crafted social media campaign and rise of a fringe paramilitary organization (Islamic Defenders Front).  Ahok was defeated and jailed for violating an archaic law leaving a stain of intolerance. President Trump used similar anti-Muslim comments to assist his election and has begun to implement a controversial ban on Muslim travel. His statements on Jerusalem have been characterized in Indonesia as anti-Muslim. Trump tweets showed the power of social media.

Economically, Indonesia rolled out monthly deregulation packages and continued to troll for foreign investment and overseas tax remittances to finance its ambitious infrastructure effort.  Meanwhile, a counter narrative developed early in the year surrounding the status of Freeport’s Contract of Work and the overall investment climate. Many US companies are chafing at issues such as: sweeping halal certification regulations, ownership caps, data localization requirements, and higher excise taxes as well as unfair court decisions. Given Indonesia’s large logistics costs “value-added” policies limiting exports and imports are not the answer and often lead to higher local costs.  Incentives for manufacturing would work better.

For a few months it looked as if the dispute between Freeport and the GOI would end in a fractious international arbitration.  We saw a senior minister threaten to kick out the company and manage the mine directly, even though no Indonesian company has had any experience with deep mining techniques, or even gone underground.   Negotiations are now continuing in a much friendlier atmosphere with a chance that a win-win solution will be found.  Indonesia eventually acknowledged the validity of Freeport’s contract and signs are good that it can be converted -in line with the terms of the 2009 Mining Law-into a permit  and investment agreement with the same protections for fiscal and legal certainty as it had under the contract. PTFI has agreed to divest shares at fair market value provided it retains full management and fiscal control as operator.  We had hoped the law itself would be scrapped or amended, as its provisions alone do not provide enough security to new companies exploring.  Without changing it, few foreign companies will invest in the sector.

The resource nationalism observed in Indonesia has its analogue in the “America First” statements of President Trump.  However, there is a difference.  So far they have not affected Indonesia’s ability to sell to the US.   We haven’t yet left NAFTA, and TPP has yet to be implemented.  Indonesia’s trade deficit with US has led to no change in policies. It also is not a cause of any job losses as much of it is due to the fact that we do not grow tropical commodities such as rubber, coffee, spices, and palm oil.

The Indonesia’s GDP will most likely end the year at 5% well below the 7% target.  The government may be satisfied with this rate, given weaker external factors, but they have to be concerned by slowing internal consumer demand and a projected rise in Fed interest rates.   In an era of lower commodity prices and changing supply chains, Indonesia’s lack of manufacturing stares out.  The Jokowi government has made some reforms that could enable its development. While helpful, they are largely at the edges (i.e. new budgeting and accountability law, eliminating duplicate regulations and reducing the time it takes to open a business), not at the core. It would take an enormous political effort to seriously modifying the bureaucratic state and judicial system that is largely defined by patronage relationships rather than merit and the rule of law.   Its never easy to track these things, but AICC has seen an uptick in the mendacity of Indonesia’s courts.  I reported last month on the nonsensical decision of the West Jakarta District court that allowed an Indonesian company to successfully avoid payment to a US Company (Blu Tether) by nullifying the sales contract that they entered into under Singaporean law because it wasn’t written in bahasa.  The fact that the decision was upheld by an appeals court is of huge concern going forward. There are other similar cases against US companies.  Many used to think doing deals with Indonesian companies under Singapore law was a way to avoid risk.  Unfortunately, that may no longer be the case.    Will Jokowi reform the court system and the bureaucracy? Probably not as long as the Ministries that oversee them are given to political parties as a return of favors for supporting the government coalition.

The pumps that don’t get maintained and lead to the flooding of Jakarta’s main arteries are like the deluge of patronage that can overwhelm the best intended policies and bilateral commercial relations.   We are going to need a lot more accountability and attention to the rule of law in 2018

(The writer’s opinions do not necessarily reflect those of the American Indonesian Chamber of Commerce or its members)

About the Author:

Wayne Forrest is President of the American Indonesian Chamber of Commerce, a private not for profit membership organization based in NY.

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