Indonesia will face a number of security, investment and trading challenges in the coming months. In this article we provide a detailed forward-looking assessment of developments in the country.
Indonesia is likely to experience further anti-government protests in the coming months, as students demand changes to various aspects of government policy.
Firms operating in the mining sector will continue to face policy uncertainty, as the government accelerates the introduction of a nickel ore export ban.
In September 2019, tens of thousands of students participated in large and disruptive protests across Indonesia.
Demonstrations were triggered by a government bill that brought the Corruption Eradication Commission (KPK) under government oversight, a decision that is likely to reduce the commission’s independence and capabilities.
Protesters issued a list of seven demands, which includes the release of political prisoners in Papua, and the prosecution of companies linked to forest fires.
Protesters also opposed the introduction of a strict new penal code, which includes penalties for insulting the president. President Joko Widodo subsequently suspended the bill proposing the amendments.
However, the new parliamentary session, which began in October 2019, may see a retabling of the legislation and any efforts to retain strict elements of the code may spur further protests.
At least 254 students have been injured in protests, with reports suggesting that one individual was also killed in Kendari. Protests are likely to continue in the coming months if Widodo does not meet protesters’ demands.
History suggests the police may respond to demonstrations with the use of tear gas and water cannons, while participants might throw projectiles or petrol bombs. As a result, the risk of property damage is elevated.
Incidents are likely to be concentrated in Jakarta, but could extend to other urban areas.
Indonesia’s economy is forecast to grow by 5.3% in 2019. The long-term growth outlook will be supported by Widodo’s planned expansion in infrastructure spending.
Following his re-election in April 2019, Widodo announced infrastructure spending totalling US$412 billion in the period up to 2024.
The 2020 budget outlines an 8% year over year expansion in government spending, with infrastructure spending set to increase by 4.9%.
Widodo’s reform agenda should also support investment and private financing for major infrastructure projects, while he has also pledged to reduce corporate tax rates and ease labor regulations. However, a protracted period of unrest will pose risks.
If Widodo continues with his agenda, persistent and disruptive protests could affect investor confidence in the country.
Despite increased spending, the fiscal deficit is expected to narrow in 2020. The 2020 budget deficit is forecast at 1.8% of GDP, down from an estimated 2.0% in 2019.
Increased spending will be increasingly targeted, focussing on long-term growth generators, rather than subsidies or debt-servicing.
Moreover, the government targets revenue growth of 9.3% in 2020, which will be supported by strong economic growth and robust palm oil prices.
The operating environment in Indonesia for mining firms is challenging. In recent years, resource nationalist sentiment has contributed to policy uncertainty, with the government prone to introducing export bans, production quotas, and stringent regulatory requirements.
In 2014, it introduced a mineral ore export ban, which was subsequently relaxed in 2017.
However, in September 2019, the government announced that it will accelerate the introduction of a nickel ore export ban — bringing it forward to January 2020, from January 2022 — which it hopes will stimulate foreign investment in electric-vehicle and lithium-battery manufacturing.
Tax cuts for firms producing electric vehicles are also planned.
Firms that fail to demonstrate sufficient progress in the development of smelting capabilities within Indonesia will face elevated regulatory risks.
In May 2019, the government suspended five companies’ export permits after they failed to demonstrate such progress.
5 Key Takeaways
- In September 2019, tens of thousands of students participated in large and disruptive protests across Indonesia. Demonstrations were triggered by a government bill that brought the Corruption Eradication Commission (KPK) under government oversight.
- Protests are likely to continue in the coming months if President Joko Widodo does not meet protesters’ demands. The police may respond to demonstrations with the use of tear gas and water cannons, while participants are likely to throw projectiles or petrol bombs.
- During his second term, Widodo plans to significantly expand spending on infrastructure projects. The 2020 budget forecasts a 4.9% increase in infrastructure spending.
- Resource nationalist sentiment is expected to contribute to policy uncertainty in the mining sector.
- In September 2019, the government announced that the introduction of a nickel ore export ban would be accelerated from January 2022 to January 2020.
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