Brief Country History
With the first presidential election happening in 2004, Indonesia has come a very long way to promoting national sovereignty, human rights, and trade in such a short time.
Just a short time ago Indonesia was ruled by the dictator Suharto who had ruled from 1968 till 1998. His reign was characterized by terrible human rights, protests, and military oppression. Leading up until the famous protests of 1998, there was a growing anti-government sentiment throughout the younger generations in Indonesia. Spurred on by speakers and protestors, students who went to Trisakti University started participating in these protests. Later, six students were shot dead by police which led to even greater protests countrywide. With thousands upon thousands crying out in the streets for this act, the military once again tried to siphon off these uprisings which led to more than five hundred protestors shot dead (many of which were students of the same university). This act is much like China’s Tiananmen square which helped urge governments to change. Thankfully, in the case of Indonesia, the reigning dictator Suharto announced he would step down after the presidential elections were through. Many protests that lead to Suharto’s resignation showed portraits of the leader as Hitler which helps to convey the public sentiment of this dictator.
This outrage sparked the rise of President B.J. Habibie, who took power following Suharto’s resignation. Currently, President Joko Widodo is leading Indonesia and is in process of his second five year term which is set to end in 2024. He is part of the Indonesian Democratic Party of Struggle and has a more free market approach to economics than most of his predecessors. Although, government intervention and price controls are still widely used through the means of subsidies and public spending.
The political risks and likelihood of times of heightened government control and potential dictatorship is higher than many countries regarded as emerging markets. While it looks like Indonesia is heading in a direction that is favorable for foreign direct investment, risks are present and should be understood before entering this market.
Country Risk Report
With great natural resources also come great natural risks associated with this area. Indonesia contains the most active volcanoes of any country in the world with more than seventy five being historically active. This is why the name “Ring of Fire” is attributed to a volcanic chain that intersects with the majority of Indonesia. This could pose risks to mining operations if the mine site was near an active or thought to be asleep volcano. Volcanic activity or the likelihood of an event happening can cause shutdowns imposed by company policy or by government intervention which can have an effect on the bottom line no matter the severity of the event.
Indonesia is also no stranger to earthquakes with around ninety percent of all earthquakes happening within the Ring of Fire. And of course, tsunamis can follow these terrible events further restricting the use of the mine site and possibly affecting personnel and equipment. Surely, insurance will be an expense worth paying in this environment!
In terms of culture, Indonesia has a strong heritage of being a the largest muslim nation in the world with around eighty seven percent of its citizens claiming Islam. While the country is growing to adopt many Western ethics and managerial practices, there are still stark cultural differences that can contribute to the difficulty of conducting business here.
The Ease of Doing Business Index score is 69.6 compared to the United States’ 92.0. Taxes are very favorable for Indonesia which helps to balance out its difficulty in conducting trade with around a total thirteen percent tax compared to the US’s seventeen.
Indonesia-China relations have been strained in the recent past despite the country’s proximity and opportunity for trade. President Widodo has acted in a way to protect national sovereignty while limiting the possibility of becoming a chinese satellite following a major conflict.
The region most disputed between China and Indonesia is the island group of Natuna which both countries claim as their own. Chinese fishing vessels are often escorted by Chinese coast guard vessels to ensure their safety. On the other hand, President Widodo has made a trip to these islands in a warship to send a clear message to China about dominance in June 2016 (which clearly did not last). Although this has been the epicenter of these minor conflicts, there is still a possibility of Indonesia-China tensions to ease and free trade to be amplified between the two countries. On the other hand, with these pre-existing tensions between China and Indonesia, further instigationairy action by either country could lead to an armed conflict of some kind, although that would be an outside possibility.
Precedent for Extreme Government Policies
Indonesia does have historical precedence for nationalization of companies. The banking industry was one of their main targets throughout the twentieth century. Under Suharto, four banks were nationalized (Danamon, CBA, Tiara Asia, and PDFCI) which sent vibrations to foreign investments in the realm of hedge fund and ETF managers who had prospects of Indonesian development. Earlier, throughout the fifties, during the height of the Western New Guinea dispute, Dutch companies were nationalized in retaliation. Similarly in 1964, British companies were nationalized during the Borneo confrontation which opposed the creation of Malaysia. While Indonesia does not have as many examples as a country like Sri Lanka for example, there is still much precedent for Indoesian conflicts resulting in the nationalization of companies who have allegiance with the opposing power. All these factors should be taken into consideration when looking at investing in Indonesian mining. Just like OPEC can nationalize the oil supplies, countries like Indonesia certainly could do the same to its other natural resources like, nickel, copper, zinc, and other metals.
Economic Future Outlook
Indonesia is a country rich in natural resources with some of its main resources being petroleum, tin, natural gas, nickel, timber, bauxite, and copper. According to McKinsey&Company, Indonesia will be one of the main catalysts fueling the electrification of automobiles in the coming decades. Rich in Class I nickel, Indonesia is the largest deposit for this high grade ore other than France which is not as practical to supply materials to the asian markets for production. With the proximity to China, Korea, Vietnam, India, and many other countries/emerging markets, Indonesia will soon serve this whole part of the globe with materials for the future. While Class II nickel can be refined to Class I, it is only economically viable at around four times the current spot price. Refining this metal requires a price of around $55,000 per kilogram and with nickel sitting at around $16,000 currently, there is still much upside potential to investing in this metal which will soon be even more highly sought after for future production of vehicles. This is why it is so important that the host country have high grade nickel in order to ensure future viability.
In terms of demand, there is more good news. In 2017, Class I nickel demand was 33Kt while the 2025 forecasted demand is north of 570Kt. That is over a seventeen fold increase from the first figure! Not only will the increased production of EV’s be beneficial to the miners of battery metals, but also the infrastructure to support all these new vehicles. With EV’s comes the need for charging stations. To show how drastic this could be just imagine every gas station as an EV charging station with many stalls. Companies like Tesla construct their charging stations in a very efficient manner. They all have internal batteries that charge up during non-peak hours to get the best electrical rate per kilowatt. This is usually at night because there is less work going on, air conditioning, and activity in general which helps to incentivize lower costs to the consumers at these times. These internal batteries store the cheaper energy for use when vehicles need charging of their own batters. So not only do the EV’s need batteries but also the stations charging them which further helps to expedite the increased demand that will be seen in the future implementation of this new technology.
The future outlook for Indonesian foreign direct investment looks especially promising as the global economy begins to recover from COVID-19. The amount of FDI heading into Indonesia was especially good in 2020 despite experiencing a major economic contraction following the start of global lockdown orders. The months following April in the year 2020 experienced levels of FDI that were nearly double normal levels which is the large increase you see on the graph. This was due to investors wanting to diversify their investments due to differences in policies of emerging markets versus their domestic political actions.
Conclusion
While Indonesia has a history of extreme leaders, corporation nationalization under provocation, strained relations with China, and a heightened risk of natural disasters it is still a very promising emerging market for the future. Investors started to realize this opportunity in 2020 when FDI doubled year over year. With many present risks Indonesia also has the most accessible and highest grade nickel deposits that could also efficiently serve the asian and australian markets to aid in the production of battery technology. With nickel itself being at very economical entrance prices, the probability of the metal’s price increasing throughout the next decade during the battery boom is a strong likelihood. Furthermore, government green initiatives will also help to further this end with increased demand coming from nations themselves in the search of reliable and renewable energy sources.