The collapse of Singapore lender DBS’ US$6.5 billion bid for Bank Danamon is further evidence of a “rising tide of economic nationalism” in Indonesia that may deter foreign investors, analysts warn.
DBS unveiled its bid to buy 99 percent of the Indonesian lender with great fanfare in April last year, in what would have been Southeast Asia’s biggest ever bank takeover.
It seemed a perfect fit. Danamon has a huge branch network across the sprawling Indonesian archipelago and 6 million customers, and could serve as a launch pad to tap into a country where millions still do not have bank accounts.
DBS was in need of new customers away from its wealthy home base of Singapore and as Southeast Asia’s biggest bank could have provided cash for Danamon to expand.
However, the Singapore bank last week walked away from the takeover, its dream of buying Indonesia’s sixth-largest lender by assets in ruins after regulators put up barriers in the form of more restrictive ownership rules.
Announcing the decision, DBS Group chief executive Piyush Gupta insisted the bank was still “positive about Indonesia’s long-term potential” — but analysts were in no doubt the failure would send a negative signal to investors eyeing Southeast Asia’s top economy.
The failure was evidence that “global investors are facing a rising tide of economic nationalism in Indonesia,” said Rajiv Biswas, chief Asia-Pacific economist at global consultancy IHS.
“The combination of rising political and regulatory risks in Indonesia could create a toxic cocktail that deters foreign investors, despite Indonesia’s fast-growing consumer market,” he said.
Observers also warned it was a bad time for Indonesia to be scaring away foreign investors amid signs its economic boom is losing steam, with growth slowing and inflation rising.
It is just the latest example of an overseas company running into trouble in Indonesia, with critics saying that legislation is increasingly targeting foreign investors unfairly. Other instances include regulations that stipulate foreign miners must gradually give up majority ownership of mining assets and a plan to ban the export of raw minerals to encourage local production.
“Indonesia has a nasty habit of strangling its golden geese with regulation in particular when it comes to the politically sensitive issue of foreign operations there,” consultancy Control Risks said in a note.
It said the political climate was particularly difficult at the moment with “economic nationalism in vogue ahead of 2014 elections.”
Critics point out that in the case of DBS-Danamon, the central bank’s decision to overhaul bank ownership rules several months after the deal was announced followed an outcry by nationalist politicians.
Rules introduced in the wake of the Asian financial crisis of 1997 to 1998, which ravaged the Indonesian economy, allowed financial institutions to buy up to 99 percent of Indonesian domestic banks and were aimed at attracting investment.
However, under the new regulations, the central bank allowed financial institutions — both domestic and foreign — to buy only an initial stake of 40 percent. Bank Indonesia will only allow institutions to take a controlling stake if they go through a complex process of financial health tests — and some speculate this is unlikely for a foreign company unless Indonesia gets something in return.