ASIATODAY.ID, JAKARTA – The government of President Joko Widodo (Jokowi) will end this year. During his total 10 year term in office, the mineral downstream policy, especially nickel mining, continued to be in the spotlight because it was too dependent on China.
Based on Corporate and Investment Banking research, Natixis, Indonesia during the early days of the Jokowi administration was an example of the success of foreign direct investment (FDI) in mining amidst the commodity super cycle which caused prices to plummet.
This is supported by the policy of banning nickel ore exports in 2020 and Jokowi’s dream of encouraging Indonesia to become the key to the battery ecosystem, making many Chinese companies that want to exploit nickel resources interested in investing.
Although this policy positions Indonesia as a major nickel player, the research highlights three challenges. First, foreign investment inflows are limited to the metals and mining sectors, while manufacturing sector inflows remain weak. Then, the overall increase in employment is still small because the mining sector is a capital-intensive sector and only contributes 1 percent of total employment, thereby limiting demand for local talent.
“This increases Indonesia’s dependence on China for exports and foreign investment,” said Corporate and Investment Banking Research, Natixis, quoted Friday, February 9 2024.
Compared with countries that are slow in foreign investment such as Thailand, Malaysia and the Philippines, Indonesia has performed well.
However, compared to the size of its GDP and working age population of 189 million, Indonesia tends to ignore its demographic advantages.
“Indonesia’s labor market is still dominated by informal workers, which is 59 percent of total workers. The mining sector has not produced absolute employment because it only contributes 1 percent of total employment,” said the research.
Although nickel is seen as Indonesia’s future, its benefits rely too heavily on foreign investment inflows rather than exports.
Currently, Indonesia’s biggest export commodities are coal, palm oil and natural gas. When the value of these commodities increases, Indonesia’s export earnings also increase.
“Nevertheless, increasing commodity exports and foreign investment policies to process nickel ore domestically also increase Indonesia’s dependence on China,” continued Natixis.
Meanwhile, the portion of Indonesia’s total exports to China during Jokowi’s tenure increased sharply, far compared to exports to the US, Europe and Japan which experienced a decline.
This condition is different from countries such as Vietnam and South Korea, where exports to the US have increased. Apart from that, Indonesia’s exports of manufactured goods as part of Gross Domestic Product (GDP) have stagnated at 8 percent in the last decade, while extractive commodities have increased. Much of the growth was driven by shipments to China.
Then, the research stated that Indonesia’s share of foreign investment had increased to 15 percent, from a total of 1 percent at the start of Jokowi’s term.
Indonesia’s over-dependence on Chinese investment is seen as the main obstacle for Indonesia to achieve progress in negotiations regarding exemptions from the Inflation Reduction Act (IRA) with the US.
Indonesia does not have a Free Trade Agreement (FTA) with the US, so nickel mined in Indonesia does not qualify for the IRA exemption.
The IRA is a policy of distributing subsidies to producers who use clean energy in the US.
Indonesia is also considered to be experiencing various structural weaknesses, such as low aggregate export value due to the low share of the manufacturing sector, both in absolute value and relative to GDP.
In contrast to other Southeast Asian countries which export more manufactured goods and goods with the highest value such as semiconductors or electronics, Indonesia’s largest export items are coal, palm oil and natural gas.
“This means that Indonesia’s export structure reflects the wealth of its natural resources but does not fully include the wealth of its workforce as a result of the hit to the market share of global manufacturing exports,” said the research. (ATN)
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