Resources like crude oil, natural gas, coal, bauxite, nickel, tin, and copper have been the cornerstone of Indonesia’s growth, but increased nationalism has driven the current government to rethink policies and the role that foreign entities have in the development of these sectors.
Earlier this week, the Indonesian government announced the revision of their “Negative Investment List.” This list was established in 2010 in an attempt to increase transparency and list sectors that were completely or partially closed off to foreign and/or domestic investment. The most recent revision for the Oil and Gas sector is as seen below:
2014- Indonesia Negative List Changes for FDI
As seen in the above chart, the Indonesian government’s revisions will directly impact the ways in which foreign entities can invest and engage in the Oil and Gas sectors of Indonesia. Limitations will be set for foreign ownership in drilling, maintenance, and construction of oil platforms, pipelines, drilling platforms, and energy storage.
How does the status quo change?
The announcement of this policy change will not change much in the short-term as it will not apply to projects that are already in development. Government officials have also said that it will not affect any existing contracts and will take ministries up to 5 years to start implementing the regulations.
In the long-term, it remains to be seen how this policy will affect the country. If it holds in the next 5 years, then the Indonesian government can expect to see decreased investment in the oil and gas sector, an area that is in dire need of upgrades and expansion.
Five years to implement such a policy is considered short for the oil and gas industry, especially in a country that requires 2 years to get the requisite 25 permits it takes to start oil and gas exploration. The playing field could potentially go as the Indonesian government had planned– a favorable environment for domestic investors. However, if such a stimulus fails, the country may have just crippled its own economic growth by limiting growth in the energy sector and signal to potential investors its volatile regulatory environment.
Resource Nationalism vs’ Practical Economic Policy
The revisions seen in Indonesia’s Negative Investment List is a growing trend in the country’s purported resource nationalism.
It is an attempt to gain greater control over domestic resources and allow domestic companies to better compete, increase value-added services at home, and build domestic expertise. This can be seen via the country’s January 2014 implementation of a ban on mineral ore exports and its November 2013 restrictions on hiring expatriates in the oil and gas industries.
There have also been reports of the government targeting foreign companies with retroactive taxes; factors that all point toward increasingly nationalistic policies that aim to completely control FDI and keep spoils in the hands of Indonesians.
Yet, ironically, the country is currently at an economic crossroads. Despite a high average growth over the last decade, Indonesia’s economy has showed signs of slowing down since 2012. In Q1 of 2014, the country saw a GDP growth rate of 5.21%, the lowest the country has seen since the economic crisis in 2009. Indonesia was also hit hard in 2013 by a drop in the rupiah’s exchange rate, causing the archipelago nation to go into an all-time high current account deficit of 4.4% of GDP in Q2. These numbers were driven by the importation of expensive foreign oil, rising fuel demands, an expanding economy, domestic fuel subsidies, and weak exports.
Indonesia still has quite a ways to go before it can be called a developed nation. In 2012, GDP per capita was $US 5,000, coming in at number 158 in the world. Primary energy consumption grew 44% between 2002-2012, with only 72% of the nation currently having electricity. What’s worse is that the government only invests about 3% of GDP into infrastructure, when other Southeast Asian countries are investing as much as 10% of GDP.
The Indonesian government has calculated that the nation will require an investment of $US 191 billion for basic infrastructure per year to keep up with current economic growth rates. About one-third of this amount is to be provided for by the Indonesian government, with the difference of $US 140 billion to be met by the private sector.
When comparing these numbers to the actual foreign and domestic investment seen by Indonesia between 2011-2013, Indonesia is still missing between $US 106-118 billion of investment from the private sector.
In order for Indonesia to continue its economic growth it will require investment in infrastructure, an increase in primary energy consumption, and more electrification. However, restrictions such as the revision on the Negative Investment List point toward resource nationalism.
The timing of this policy’s release is likely aimed at bringing the favor of voters in the upcoming July 2014 presidential election. The current President Yudhoyono’s term has been marked with graft and corruption scandals, making it imperative for him and those in his political party (Democratic Party) to take a crack at Indonesia’s increased nationalist sentiments to protect the party and the President’s legacy.
With 2014’s preliminary legislative results looking at a loss of 50% of votes and fourth place overall, the current ruling party will need all the help they can get to be included in any coalition for the next government. What remains to be seen is whether the Indonesian government will reverse these regulations.
At the moment, with an economy weak from reduced exports in their core mining sector, fuel subsidies that account for 25% of the country’s annual public expenditures, and lack of infrastructure in all core sectors; it is likely that this Negative Investment List will be reevaluated by the new presidential candidate in the later half of 2014.