Natural resources and sensible leaders bring high hopes for Indonesia

http://www.theguardian.com/world/2014/jan/09/natural-resources-high-hopes-indonesia

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A political tussle over Indonesia's formidable mineral exports goes a long way towards illustrating the political risks of doing business in Indonesia.

On 12 January the country is due to enact legislation that will ban exports of unprocessed mineral ore, following the passing of a law in 2009. The ban is one of President Susilo Bambang Yudhoyono's landmark economic reforms. But with Sunday's deadline looming, last-minute exemptions are still being argued over.

The tussle between those who want Indonesia to benefit more from its mineral wealth and those who worry about the long-term impact of export controls reveals the growing wave of nationalism, in the runup to this year's elections, that has prodded lawmakers to take more control of the country's vital resource sector. Oil, gas coal and minerals are the government's top revenue earners.

The bigger picture remains fairly benign. Indonesia tends to be blessed with capable policymakers. Agus Martowardojo, the central bank governor, is credited with minimising the fallout of the US Federal Reserve's decision to wind back its monetary stimulus through currency swaps with other regional central banks and stricter capital adequacy rules for the country's lenders. The finance minister, Chatib Basri, has won praise for beating back protectionists in cabinet by killing off ill-advised import quotas that caused the prices of beef and vegetables to soar by more than half during the first five months of 2013.

"Bad times make for good policy," he told journalists late last year. "We have to rethink protectionism."

While growth may be slowing, Indonesia will experience an increase of almost 6% this year underpinned by a rising consumer class. And for only the third time this sprawling country of more than 240 million people will directly elect a president when it goes to the polls in July.

By then, the impact of the mineral export ban will be more apparent.

In August the government required all tin produced in Indonesia to first be sold on a domestic exchange, in a bidan effort to unseat the London Metals Exchange supremacy when it comes to trading the metal. In early 2012, the government unexpectedly halved to 10 years the time foreign-owned projects must sell a majority stake to local investors.

The ban is expected to slash production of nickel by 80%. Production of bauxite, used to make aluminium, will slump by 98%, the ministry for energy and mineral resources has warned.

Indonesia can ill afford to lose the export earnings. The country's current account deficit is stubbornly high. It narrowed to $8.5bn (£5.20bn) in September after reaching a record $10bn in the three months from June. Balance of payments issues and nationalistic policies such as the ban saw the rupiah fall more than 20% against the US dollar last year.

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