Indonesia likely to continue its ‘commodity protectionism’ for some more time
The Indonesian government will continue its commodity protectionist measures in the coming year as its President Joko Widodo will likely look to implement populist measures in the wake of his declining popularity. Over the last few months, Jakarta has resorted to such protectionism affecting commodity markets ranging from metal to coal to edible oils.
US research firm Fitch Solutions Country Risk and Industry Research (FSCRIR), in a note on the Widodo government completing eight years in power, said it expects “Indonesia’s reform agenda to take a backseat over the coming year, as the government continues attempting to shore up domestic political support amid rising inflation and growing social discontent”.
Ever swinging policies
According to the independent policy think-tank Lowy Institute, based in Sydney, Australia, there is little evidence that Widodo sees trade deals as a way to drive liberalising domestic economic reforms at home.
In 2012, the East Asia Forum said Indonesian trade policy has always swung backward. Jakarta’s commodity protectionism is under scrutiny after it banned coal exports from the New Year to ensure supplies to local power generating companies improved. The ban was lifted a week later.
In January last year, Indonesia banned exports of raw nickel on the grounds that it wanted more investments in mining and exports of nickel-derived products. In November last year, the Widodo government said it will halt refined tin exports from 2024, resulting in the metal’s prices soaring.
Palm oil export ban
But above all these, Indonesia’s act of banning exports of crude palm oil and refined, bleached and deodorised (RBD) palm oil from April 28 has not gone well with the global commodity. Though the ban was revoked on May 24, uncertainty in trade prolongs as Indonesia has not spelled out the domestic market obligations that exporters will have to meet to get permission to ship the oil.
“President Joko Widodo’s popularity has been declining, which sets the stage for a continued shift towards populist measures. Crucially, further rounds of stop-start protectionist measures, particularly on exports of Indonesian coal and palm oil will remain on the government’s agenda,” Fitch Solutions said.
Writing for Lowy Institute, Ben Bland said though the Indonesian President is a former furniture exporter, “he has a deeply contradictory approach to external economic engagement”.
Widodo is serving his second five-year term. Though this is said to be his final term, there is speculation that he might seek a third term. Hence, his policies would tend to be populist, FSCRIR hinted, pointing out that his popularity has dropped to 58.1 per cent —- a six-year low- due to rising inflation.
Fitch Solutions said rising protests led to students’ protests in Jakarta recently, though on a smaller scale. But that has resulted in Jakarta responding with an “unprecedented ban” on exports of all types of coal in January. The curb was relaxed a week later but it was a move to effectively subside energy costs indirectly.
Though the Indonesian government will continue “leaning towards protectionism, we doubt that the authorities will be able to sustain a prolonged ban on these key commodity exports. That would prove too costly from a fiscal and trade balance perspective, and would also risk a significant international backlash,” Fitch Solutions said.
A most likely scenario would be the Widodo government will continue imposing “stop-start protectionist measures’ in the coming quarters,” it said.
Impact of ban on growers
The Lowy Institute in a comment in 2015, said Indonesia’s attitude towards trade and investment has been one of “sitting on the fence”. However, trade experts point out that such protectionist policies have begun to affect the domestic sector.
For example, the ban on palm oil exports has resulted in small farmers not harvesting fresh fruit bunches (FFBs), while producers, staring at overflowing storage, stopped buying FFBs. In the case of the ban on coal, it affected the producers as export is the main source of income since supply to the domestic market is at a discount price fixed by the government.
Experts say Indonesia also tends to lose revenue from such bans and its economy could, as a result, be affected. Though Indonesia’s flip-flop on exports of commodities has impacted the prices, currently the global commodity market is witnessing a surge in prices mainly in view of the Russia-Ukraine war.
Prices of coking coal, used by the steel industry, have consolidated above $400 a tonne currently at $412, up three times year-on-year, while nickel has gained over 50 per cent year-on-year at $28,062 a tonne. Palm oil rates have increased by over 55 per cent to 6,401 Malaysian ringgit ($1,458.75 a tonne) currently.
June 03, 2022