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Indonesia's widening deficit takes toll on resource nationalism drive

By Fergus Jensen and Randy Fabi

JAKARTA (Reuters) - Indonesian policymakers are scrambling to ease nationalistic resource rules that threaten to slash mining exports from January and potentially widen a current account deficit already at a near-record high.

The deficit, which reached $9.8 billion in the second quarter, or more than 4 percent of GDP, has become enemy No. 1 for President Susilo Bambang Yudhoyono's administration, and any policies that worsen the situation have come under fire.

Regulations initially passed more than a year ago to allow Indonesia to seize more control over its natural resources are being reviewed as the government looks to bolster exports to offset a bulging import bill.

"For exports, this is an emergency," Energy and Mineral Resources Minister Jero Wacik told reporters recently. "What is important is that the balance of imports and exports improves for our country."

The trade deficit in July widened to a record $2.31 billion from $880 million the previous month due to a spike in oil imports. The trade balance along with investment income make up Indonesia's current account deficit.

Among the policies the government is reconsidering are a pending ban on mineral ore exports, and a royalty hike and export tax on coal. Shipments from the two industries represent more than 15 percent of Indonesia's total exports by value, or around $2.5 billion a month.

Indonesia is the world's top exporter of nickel ore, thermal coal and refined tin.

"A ban applied (on mineral ore exports) in January 2014 would lead to a significant disruption of exports," Barclays analysts said in a research report.

"This could aggravate market concerns regarding the country's current account deficit, which would be an unattractive proposal for the government."

LOOKING FOR A WAY OUT

The Energy and Mineral Resources Ministry has initiated talks with lawmakers to revise the 2009 law that requires mineral ores to be processed domestically before export, starting from January.

One option being discussed is to allow limited exports from companies that have already made investments or signed agreements to process ore domestically, such as PT Perusahaan Perseroan Aneka Tambang (Antam) .

"Those who have shown good intentions (in processing ore domestically) should be allowed to continue exports, but they need a legal umbrella first," Thamrin Sihite, a director general at the ministry, told reporters last week.

A second option being considered was to delay the ban and instead increase the ore export tax by as much as 50 percent from the current 20 percent, said Tony Wenas, vice chairman of the Indonesian Mining Association.

Both options would still lead to a decline in mineral ore exports, although much less than a blanket export ban.

The proposed changes come a month after the government scrapped its 2013 export quota system for minerals to increase overseas sales and encourage mining investment.

In a further retreat, the ministry earlier this month indicated it would relax a rule forcing foreign miners to sell majority stakes within 10 years of the start of production.

AVOIDING THE BREAKING POINT

The ministry is also looking at loosening regulations that would increase royalties on coal production for mining permit holders, known as IUPs, and a new tax on all coal shipments next year.

Indonesia ships around $2 billion worth of coal a month, one of its largest exports by value. A drop in shipments would exacerbate the country's current account deficit.

Finance Minister Chatib Basri told local media on Friday that the government would not introduce the coal tax next year in order to protect exports, but would impose the planned royalty hike.

Indonesia in January plans to hike royalties for IUP miners, which include Antam and PT Bukit Asam , to between 10 and 13 percent from 3.5 to 7 percent currently.

The Indonesian Coal Mining Association has warned the world's top thermal coal exporter could see output from IUPs, which represent 30 percent of domestic output, tumble by as much as 40 percent next year if the government hikes royalties. Indonesia produces around 400 million tonnes of coal a year.

"The government is crazy to consider increasing royalties or imposing new taxes and fees on the coal industry, given the weak market conditions and the obviously weakened financial position of many coal producers," said Roleva Energy coal analyst Bart Lucarelli.

"At some point the breaking point will be reached and supply will collapse."

Sihite said the ministry has not yet decided how it will implement the royalty hike next year.

(Additional reporting by Michael Taylor and Rieka Rahadiana in Jakarta; Editing by Richard Pullin)

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