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Problems Faced to Restore Faith in Indonesian Market

Problems Faced to Restore Faith in Indonesian Market

President Jokowi’s win may be buoyed somewhat by the fact that it occurs so immediately before Indonesia shuts down for a week or so during Eid al Fitri celebrations, as Jakartans complete their annual pilgrimage to their home provinces and villages, some thoroughly enjoying the new toll roads. In the meantime, as the trade war between China and the United States has escalated, and the World Bank has revised its projections for global economic trend, downwards from 2.9% to 2.6%, in a report titled ‘Global Economics Prospects: Heightened Tensions’.

According to Finance Minister Sri Mulyani Indrawati, this trend will correspondingly slow down domestic growth in the 3rd and 4th quarters of 2019, and that the effects can already be seen in the slowing down of Indonesian exports to China and the United States, two of the main importers of Indonesian goods. The Finance Minister reportedly is hopeful that the Eid break will give a boost in consumer transactions, and has vowed that the Government will focus on reducing economic inequality by way of boosting investments, citing improving debt rating and Indonesian competitiveness. Hopefully the Finance Minister’s optimism will be rewarded, as in the meantime, Indonesian fuel imports are still increasing, creating a rather imposing energy trade deficit that comes into stark focus, given weakening exports.

As an energy resources-rich nation, something like this mountainous energy trade deficit should continue to be shocking for us (as a technologically savvy country situated on the equator, it is nothing but dumbfounding). However, the tension between national sovereignty and the process of privatizing the Indonesian energy sector has always created policy and regulatory stumbling blocks to our potential energy independence. The reality of the situation is that Indonesia currently does not yet have the aggregated capabilities required to explore, extract, and exploit its own fossil fuels. Similarly, the way the national power grid is structured and organized cannot yet exploit renewable resources, including the obvious source available to nations blessed to be situated on the equator: sunlight. The easiest way for Indonesia to get access to these hidden caches of treasures would be to allow more direct foreign investment; however, this is perennially becoming a political issue, with those who advocate foreign investment being accused of pandering to foreign business interests. ‘Why can’t we just get at these resources ourselves?’ is the question that keeps being asked–the answer, as discussed, is that we don’t have the resources, necessitating a business partnership involving foreign investors who do have the resources. The danger of a political climate that is inimical to foreign investment is that, when big projects actually are on the way or are ongoing, they are more fragile to breaking down due to political pressure, to the detriment of the Indonesian economy. One such major project, the Masela block Abadi liquified natural gas (‘LNG’) project, was heavily criticized by people who think the approved investment is against the national and local people interests. The investment approval was then revised drastically. Previously, due to that revision, it was reported that Shell was considering to exit from the Masela block, raising significant uncertainty with regards to how the investment climate could be adversely affected. However, on June 16th the Indonesian Government and Inpex signed a new deal on the Abadi LNG project, which includes the agreement that Inpex’s contract to operate the Masela block shall be extended by 27 years, until 2055.

The kind of uncertainty in the macro sense above is also not helped by things like disagreements between Joko Widodo’s Ministers, Rini Soemarno, Minister of State Owned Enterprises (‘BUMN’), and Ignasius Jonan, Minister of Energy and Mineral Resources (‘ESDM’), namely their reported disagreement on the Government Regulation (Peraturan Pemerintah,’PP’)to be signed by Joko Widodo, concerning whether lapsed mining licensesmay be extended by companies, or whether they need to be offered to SOEs first, asserted by Minister Soemarno, whose office reportedly cited the ESDM Law provisions requiring such offers. These sectoral kinds of regulatory uncertainty will certainly have significant impacts on market players–just as a small example, if companies cannot readily extend their licenses, they will become more likely to default on their bank loans, with all the knock-on effects that will therefore have on the economy.

The energy trade deficit, foreign investment phobia, and their implications on the economy reflect a legal-policy problem that President Joko Widodo’s regime need to grapple with very quickly in order to restore faith in the Indonesian market. In order to gain popular support for this, the Government needs to do a lot of work to decouple nationalist sentiments from critical economic policies and regulations. President Joko Widodo’s regime has actually done significant work on important reforms, for instance reforms in the taxation sector; it should go without saying that tax reforms are essential to support national development and welfare agendas that can then be leveraged into more ambitious developmental goals. According to news reports, there was an increase of 9.4% of the self-reporting of annual tax reports this year; however, the figures add up to a mere 60% or so of the known taxpayers required to report. Clearly, there is still a lot of work that can be done to encourage Indonesians to pay taxes, namely to make it easier and to make it fairer. There are many models of tax collection used by nations to make it easier, and perhaps there are still many studies required before the Indonesian model may be improved, however, making taxation fairer in Indonesia dovetails with another national effort: fighting corruption. It is well known that white collar and corruption crimes share significant space with tax evasion, and to this end, one crucial area for tax policy reform should be addressing how to engage national corruption fighters with the Ministry of Finance.

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