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The sleeping giant awakens: Indonesia reopens to the world
To focus solely on pandemic-hit sectors like hospitality would also miss the larger picture of Indonesia’s growth trajectory.
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This aerial image shows a worker standing on the back of a truck loaded with coal at the Karya Citra Nusantara (KCN) Marunda port in Jakarta on Jan. 17, 2022, after Indonesia eased an export ban on the commodity. (AFP/Adek Berry)
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fter experimenting with localized trials in Bali, Bintan and Batam, Indonesia effectively reopened its borders to tourists by reinstating visa exemptions for ASEAN nationals and scrapping on-arrival COVID-19 tests for vaccinated travelers on April 6. Citizens of 33 other countries including the United States, United Kingdom, China, Japan and multiple European Union nations are also eligible for visas-on-arrival.
The reopening will provide a further boost to Southeast Asia’s largest economy, which has been on a gradual recovery after gross domestic product (GDP) contracted 2.1 percent in 2020 following a nationwide outbreak of COVID-19’s deadly delta variant. Businesses in the retail, transport, and hospitality sectors in particular will rejoice at a likely surge in visitor arrivals as travelers return in force – Indonesia saw 16.1 million visitors pre-pandemic (2019), but only 4 million in 2020 and 1.6 million in 2021.
These encouraging prospects were undoubtedly on the minds of investors participating in the initial public offering ( IPO) of Indonesian tech juggernaut GoTo, whose shares jumped 13 percent on the first day of trading.
Nonetheless, to focus solely on pandemic-hit sectors like hospitality would also miss the larger picture of Indonesia’s growth trajectory. At a time of heavily disrupted supply chains and rising commodity prices, Indonesia’s abundance of natural resources – from coal to iron to palm oil – places the country in an enviable position of strength. Russia’s invasion of Ukraine and the subsequent spate of sanctions placed against the former has only accentuated the strain on commodities.
Significant attention has already been paid to Russia’s supplies of oil and gas as well as wheat, but it would be remiss to neglect other resources like nickel (used for producing steel and car batteries, among others), of which 10 percent of the world’s supply originates from Russia. Incidentally, Indonesia has the world’s largest nickel reserves at 21 million metric tons.
However, companies hoping to rely on Indonesia as an easy source of raw materials should temper their expectations. In 2021, President Joko “Jokowi” Widodo announced the urgency for the country to upgrade from its status as a commodity-based economy to encompassing more downstream components of the value chain.
He made these statements at a groundbreaking ceremony of an electric vehicle battery plant in Karawang, West Java – described as Southeast Asia’s first – a non-too-subtle signal highlighting Indonesia’s “downstreaming” manufacturing push from nickel extraction to electric vehicle (EV) battery production. The country has aggressively courted investments in battery manufacturing in recent years, with Chinese and South Korean firms among the first to respond to the call.
The idea itself is nothing new. President Susilo Bambang Yudhoyono’s administration passed the Law on Mineral and Coal Mining 2009 as well as the Energy and Mineral Resources Ministerial Regulation (Permen ESDM) No. 1/2014, which forces mineral extraction companies to convert a minimum amount of raw material (ore) into semi-processed products.
However, this was never strictly enforced, and exports continued until the current administration issued Permen ESDM No. 25/2018 which imposes a gradual ban on ore exports – including nickel, cobalt, iron, bauxite, copper, gold, and tin – with only processed or semi-processed materials allowed for export. This has led to hundreds of new smelters being established across the country, with the largest operated by Virtue Dragon (owned by Chinese firm Jiangsu Delong Nickel Industry) in Central Sulawesi.
The Indonesian government has similarly targeted exports of coal, which supplies more than 60 percent of Indonesia’s energy needs: in 2021, it increased the Domestic Market Obligation (DMO) for national coal producers from 10 percent to 25 percent, meaning that each holder of coal mining concession rights must sell 25 percent of all production at a discounted price to domestic market.
In February 2022, the government also banned coal producers who failed to fulfil their DMO from exporting coal. In a nod to the downstreaming agenda, state-owned coal producer PT Bukit Asam is aiming to increase the gasification of coal into dimethyl ether (a substitute for LNG) as one way to add value to Indonesian-sourced coal.
Indonesia’s downstreaming agenda has taken a long time to come into fruition, and – as with many of its other government policies – time will tell if this recent push bears success. That said, the odds have never looked better for a meteoric resurgence by Southeast Asia’s sleeping giant.
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The writers are project managers for Barber Mullan & Associates risk consultancy. These views are personal.
