Frequent Policy U-Turns Threaten Indonesia’s Economic Ambitions

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(Bloomberg) — Even by the standards of a country notorious for frequent regulatory surprises, Indonesian President Joko Widodo’s policy gymnastics on palm oil have been extraordinary.

The world’s biggest producer of palm oil announced a sweeping ban on cooking oil shipments late on Friday, April 22, to curb domestic shortages. That sent global prices surging on Monday, but the market was relieved when reports emerged from Jakarta that only exports of palm olein, a refined product, would be halted. Two days later the government delivered another shock, saying the ban would be even wider and also include crude palm oil.

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It’s not the first time that Jokowi, as the president is known, has blindsided commodity producers, traders and investors. The biggest exporter of power-station coal paused shipments earlier this year to secure dwindling supplies, and it’s also considering an export tax on some nickel products.

Jokowi wants to move Indonesia up the value chain by processing more raw materials at home. The strategy has had some success, most notably in the battery metals space, and it resonates with voters who elected him for a second five-year term in 2019. Balancing his resource nationalism and desire to protect Indonesians from rising prices against the need to lure more offshore funds to finance his ambitions is tricky, however. The palm oil episode shows how disruptive and poorly communicated policy can alienate investors.

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“The flip-flop and protectionist policy will tarnish Indonesia’s reputation and standing as an attractive foreign-direct investment destination,” particularly in agriculture, energy and exports, said Hak Bin Chua, a senior economist at Maybank Investment Banking Group. “Multinational companies are looking for reliable production hubs and supply chains, which are not at the mercy of populist mood swings.”

The sprawling tropical archipelago has endured a long history of foreigners plundering its resources that dates back to the Portuguese seeking spices in the 16th century. Jokowi’s strategy is a response to that, although the coal and palm oil interventions have been more about cushioning poorer Indonesians from the impact of the commodities boom and surging inflation.

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The palm oil export ban is meant to ensure there is ample supply of cooking oil priced at 14,000 rupiah ($0.97) a liter, but will be a drag on the wider economy. It’s likely to shave around $2 billion off exports and cut economic growth by 0.15 to 0.2 percentage points for each month it stays in place, Goldman Sachs Group Inc. said in a note. The country is targeting gross domestic product growth of 4.8% to 5.5% this year.

Policy uncertainty has risen over the past few months as the scope of action widened beyond the value-add strategy, said Vishrut Rana, an economist at S&P Global Ratings in Singapore. That’s a challenge for commodity firms, given the country is a big producer of palm oil, coal, nickel, copper and rubber, he said.

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See also: Why Indonesia Curbs Commodity Exports, Jolts Markets: QuickTake 

That uncertainty could also threaten Indonesia’s ability to hit investment targets. The government is aiming for total foreign and direct investments of as much as $131 billion for next year, around 6% higher than 2022.

Indonesia’s efforts to attract funds from offshore have been hampered in the past by corruption — its sits near Brazil and Turkey on Transparency International’s Corruption Perceptions Index — and excessive red tape. Jokowi has sought to improve the climate with his so-called omnibus law that was first introduced in 2019, but that now must be revised due to court orders.  

The policy swings add to the existing concerns about Indonesia as an investment destination, said Bob Herrera-Lim, managing director for Southeast Asia at political risk consultancy Teneo. The recent export bans also raise fresh questions on how far Indonesia might take its resource nationalism, he said.

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In the metals space, Indonesia is trying to leverage its mineral deposits to become a hub for battery and electric vehicle production. It’s looking at banning or taxing shipments of various metals and is also requiring foreign investors to build smelters onshore rather than just extracting raw materials and processing them elsewhere.

These policies seem to be bearing fruit. Chinese nickel producers like Tsingshan Holding Group are adding projects, and the total number of operational mineral smelters is forecast to rise to 53 in 2023, from 19 early this year. South Korean conglomerates Hyundai Motor Group and LG Energy Solution are building a $1.1 billion EV battery plant, with commercial production expected to start in 2024.

The palm oil ban might not move the needle much on current decisions on Indonesia, given investors are already accustomed to policy shifts, according to Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. But the chaotic implementation does leave a “bitter taste in the mouth,” he said. 

“It does leave the question of how much better Indonesia can get in terms of attracting investors,” Wiranto said. “If it can offer greater policy certainty, rather than whipsawing them with one U-turn after another.”

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