Indonesia heads into 2013 with continuing questions for foreign companies within an overall atmosphere of solid 6% -6.5% economic growth.  The blemishes –if handled well–will not take away from the rosy complexion.  Those looking for stimulative reforms that would smooth the path for foreign companies may have to wait until the next Administration or look to innovative regional leaders.    It would be nice to be wrong here.  But, lets be clear, Indonesia remains in a solid position for long term growth.

Although resource nationalism remains a concern and ambivalence towards the role of foreign companies continues to hamper needed investments, the economy is likely to pick up steam as growth returns to Indonesia’s export markets following the 2008-2010 period of de-leveraging.   We already see some retreating on the export ban for minerals but settling the contract renewals of key investments such as the Mahakam oil and gas project (Total) and Freeport’s Grasberg mine may be further delayed and await the change of leadership in 2014.  The unfortunate truth is that the ruling coalition, led by President SBY’s Partai Demokrat, may have difficulty sticking its neck out for foreign investors because to do so may make them appear weak in the next election cycle.  Of course, renewing contracts as early as possible will always lead to more investment and faster growth.  But as we near 2014 many decisions of the current Administration have a political overlay and require more calculation.   Wouldn’t it be great to just hit the “clear” button.

The consumer sector is humming along and there should be little let up here.  Confidence is up and investment to serve this sector has blossomed and will continue.   Infrastructure and logistics remain a stumbling block and recent rises in minimum wages is a pressure many local businesses will have a hard time implementing.    Inflation, steady throughout 2012, is likely to increase.  On the other hand, the government has not backed changes to fuel subsidies (electricity rates may head up) and –even if it wanted to– may not be able to get the votes in a fragmented Parliament. In Indonesia fuel rates are like taxes in the US. 

Indonesia will make another push for infrastructure investment centered around an event in November when the country hosts APEC.   But, any strong policy changes such as better land clearing procedures or creativity in financing (municipal finance) will remain for the next Administration.  However, at the local level, we may see some innovations on the margins that may help alleviate the road  and power gridlock.  News on the effectiveness of last year’s new law on land acquisition will likely be muted.  Challenges remain to translate the government’s master plan vision (MPE3I) into achievable goals by the line Ministries, may of whose talented personnel find it confusing.

We will see some of the FDI investments made in the last 2 years open in 2013.  The growth story, and a predicted better balance of payments should lead to a strengthened rupiah. Indonesia will again have success in the international sovereign bond market. The nation’s credit rating may see some modifications based on concerns about some of the nationalist –dare I say protectionist– policies.    Attention to the Churchill Mining dispute –now on the agenda of the World Bank’s Court for the Settlement of Investment Disputes– will most likely minimally affect the overall investment climate as its already been factored in by most companies. 

Trade and Tourism

If China’s economy continues to recover Indonesia will see better numbers in these sectors.  Signs are good.  Uncertainty in government policy in the extractive sector  — where yet again officials are warning the target for oil and gas exports will not be met– as well as ethical purchasing behavior of consumers in export markets (paper, palm oil) also inhibiting factors.

The Constitutional Court ruling of November 2012 to dissolve the oil and gas regulator BP Migas may have offspring.  Those groups who believe in economic nationalism, looking to make a point with voters, may institute “copy cat” suits that could more directly seek to limit foreign ownership.   In 2013 we should begin to see draft revisions to the 2001 Oil and Gas law as mandated by the November court decision.  The vulnerability is the language of Article 33 or Indonesia’s constitution which states that all natural resources shall be used for the “people’s welfare”. 

10 political parties will meet the threshold to field candidates in the June 2014 Parliamentary elections and September 2014 Presidential elections.  The corruption scandals tainting the Partai Demokrat are fueling the hopes of parties such as Golkar, whose share of votes has been declining.  Towards the middle to end of 2013 we will have a better idea of the shape of these elections but even then the picture will remain incomplete as some President/VP tickets may await the results of the Parliamentary elections.   With so many parties, coalition building, never a precise game in Indonesia, will be dominant, as will be the search for a candidate with star power who might feed into many Indonesians’ desire for a ratu adil, just leader.    Could it be the young charismatic Governor Jakarta, Jokowi, who is sure to be tested by this week’s floods. Or what of Suharto’s son-in-law Prabowo, who remains popular in polls for his perceived strength, but is also weakened by his track record as an Army commander.  Will SBY choose an heir from his own family or let the process occur more organically.  2013 may yield even more questions then answers.

Foreign/US-Indonesia Affairs

Indonesia hosts an important APEC Leader’s Summit in November in Bali (Obama is scheduled to attend), a chance to showcase its advancing position on the world stage, as well as lead the many discussion of implementing APEC free trade goals. Foreign Minister, Marty Natalegawa,  will no doubt be at the center of settling or at least cooling off the South China Seas dispute, which is mostly about access to deep ocean mineral resources.  President SBY is slated to return to the US in May 2013 for meetings at the UN.  There could also be a bilateral with President Obama.

2012 ended with Indonesia’s anti terrorism command (Detachment 88) defusing a terrorist cell in Eastern Indonesia but with activity heating up in Mali and Algeria, one cannot be complacent that Indonesia’s has completely eradicated its terrorist practitioners.  The police uncovered a plot aimed at several US official facilities in 2012 and we can expect that vigilance will remain a necessity for the near term. For travelers, its generally recommended to consult US State Department websites that post alerts, warnings, and health information.

Final Comment
Short summaries are inherently marred by their incapacity to cover everything.  But the above notes should give readers a flavor of whats ahead for 2013.   (These comments may or may not reflect the interests of AICC members)