Indonesia moves closer to tipping point for investors
Indonesia moves closer to tipping point for investors
While the court decision to declare BPMigas unconstitutional was certainly unexpected, it fits the pattern of how business is conducted in the Southeast Asian nation.
The ruling certainly sounded dramatic, but the real question is whether the abolition of BPMigas actually changes anything for both existing and future oil and gas projects in the region.
Certainly the government moved quickly to try and reassure investors that current contracts would be honored and that there should be no uncertainty for potential new investments.
The details of the court ruling also appear to safeguard existing agreements with oil majors including BP Plc, Chevron, Exxon Mobil and CNOCC.
It also gives the future power to regulate to the government, which has said it will set up a new body to control the industry.
The good news for Indonesia's foreign partners in energy resources is that the country wants to increase its oil and gas output and is therefore unlikely to mess too much with existing contracts or put in place a framework that will drive investors elsewhere.
The bad news is that this is another example of the somewhat chaotic nature of doing business in Indonesia, and the uncertainty that is generated by every such occurrence raises the risk profile of investing in Indonesia.
Indonesia is the region's largest oil producer and has plans to increase output by 30 percent to over 1 million barrels per day. It is also the third-ranked producer of liquefied natural gas and the world's biggest thermal coal exporter.
But Indonesia also appears to play it fast and loose when it comes to regulations and policy-making for its resource sector.
Consider that this year has seen the mining industry thrown into turmoil by a series of regulations that have damaged foreign confidence in the sector.
These include proposals for a mining export tax, the ban on exporting unprocessed metals and ores, the domestic reservation requirement for coal production and a requirement that foreign companies sell 51 percent of their stakes in mines to locals within 10 years of initial production.
These measures amount to a radical shake-up of Indonesia's mining sector, which contributes about 11 percent of gross domestic product.
It has been increasingly clear that Indonesia wants a greater share of the resource sector to benefit locals, and it wants more say over the industry.
This in itself isn't that unusual in a global context, where countries with resources are becoming more reluctant to allow foreign investors to control and exploit reserves.
What sets Indonesia apart is that there doesn't seem to be a coordinated way of going about this, with government ministers making ad hoc announcements on policies that are often watered down before implementation.
It helps to view Indonesia through the prism of its domestic politics, and right now there is jockeying ahead of the 2014 presidential poll, and nationalistic sentiment is likely to increase as the vote approaches.
One of the contenders to replace President Susilo Bambang Yudhoyono is Coordinating Minister on Economics Hatta Rajasa, who appears to be having some success in getting the various government ministries to work together to boost nationalistic economic policies.
The court case that disbanded BPMigas wasn't brought by the government, but by a collection of individuals and groups, including Islamic organizations.
Their motivation isn't clear, but it wouldn't surprise if resource nationalism was a factor.
The court decision on BPMigas has the potential to result in changes to how the production sharing contracts with foreign oil companies are structured, and until there is clarity on the issue, there will be discomfort.
Whether this will lead to delays or cancellations in projects remains to be seen, with fears that BP may be more cautious now on building a planned third train at its Tangguh LNG plant in Papua.
However, any company doing business in Indonesia should be aware that uncertainty is part and parcel of the deal.
The question becomes whether the BPMigas saga tips the uncertainty balance enough to place Indonesia in the too-hard basket for foreign investors.
My guess would be probably not, but we are getting closer to the tipping point.
— Clyde Russell is a Reuters market analyst. The views expressed are his own.
2 years on, Brexit vote has taken a toll on UK economy
- Big companies are sounding the alarm bell, with plane making giant Airbus this week threatening to pull out of the country, where it employs 14,000, if it gets no clarity on future trade deals
- The governor of the Bank of England, Mark Carney, estimated recently that average household incomes are around 900 pounds lower than the bank was forecasting on the eve of the referendum
LONDON: While it’s still unclear what Brexit will look like when it happens next year, the decision to leave has already had a clear effect on the economy: households are poorer, companies are more cautious about investing, and the property market has cooled.
In the two years since the vote to leave the European Union, Britain has gone from being a pace-setter among the world’s big economies to falling into the slow lane. And the uncertainty over what relations with the EU will be when Brexit becomes official on March 29, 2019 could make matters worse.
Prime Minister Theresa May’s Conservative government remains split on what those relations should be. There are those who favor a “hard Brexit,” a clean break that takes Britain out of the bloc’s free trade union but also gives it more freedom to strike new trade deals around the world. Others want to keep Britain as close as possible to the EU, Britain’s biggest trading partner, which could mean it has to obey more of the bloc’s rules.
Big companies are sounding the alarm bell, with plane making giant Airbus this week threatening to pull out of the country, where it employs 14,000, if it gets no clarity on future trade deals.
“Thousands of skilled, well-paid jobs are now on the line because of the shambolic mess the government have created over the Brexit negotiations,” said Darren Jones, the lawmaker for the community where Airbus has its plant.
Before the referendum of June 2016, the British economy had been one of the fastest-growing industrial economies for years. Now, it’s barely growing. In the first quarter of this year it expanded by just 0.1 percent from the previous three-month period, its slowest rate in about five years.
For most people, the first and most noticeable impact was the drop in the pound. The currency slid 15 percent after the vote in June 2016 to a post-1985 low of $1.21. That boosted prices by making imports and energy more expensive for consumers and companies — the rate of inflation hit a high of 3 percent late last year.
The weaker pound helped some companies: exporters and multinationals that do not sell mainly in the UK But it hurt consumer spending and businesses that depend on their shopping. The retail industry was hit hard, with high-profile companies like Toys R Us and Maplin going bust, and supermarket chain Marks and Spencer planning deep cuts.
While prices rose, wages lagged, even though unemployment is at its lowest since 1975, at 4.2 percent.
“After Brexit, prices definitely went up,” said Nagesh Balusu, manager of the Salt Whisky Bar and Dining Room in London. “We struggled a bit earlier this year, so now we’ve increased the prices.” The bar is next to Hyde Park, a popular destination for foreign visitors. “The tourists have a good exchange rate. They know they can spend a little bit more than they usually do. But the locals are coming a little less. They are starting to think about how much they spend.”
The governor of the Bank of England, Mark Carney, estimated recently that average household incomes are around 900 pounds lower than the bank was forecasting on the eve of the referendum.
The real estate market, meanwhile, has cooled considerably, with the number of property sales in London near a historic low last year, according to estate agent Foxtons.
While some foreign prospective buyers were attracted by the drop in the pound, others seem to have been scared off by uncertainty over what Brexit might mean for their investment.
House prices are stagnating after years of gains, also due to expectations that the Bank of England will keep gradually increasing interest rates.
Nic Budden, Foxton’s CEO, predicts that the real estate market will remain challenging this year, while Samuel Tombs, analyst at Pantheon Economics, predicts that house prices will flatline for the next 6 months.
Against the backdrop of uncertainty, businesses have become more reluctant to invest in big projects. Because Brexit could lead to tariffs on EU imports of British goods, companies are hesitant to spend big on British plants and office space before they know what the new rules will be.
Benoit Rochet, the deputy chief of the port of Calais, the French town across the Channel from Britain, complained to a parliamentary committee this month that “we know there is Brexit but we don’t know exactly what Brexit means.”
“You are not alone,” responded the Conservative chair of the committee, Nicky Morgan.