Ahead of the annual Indonesia Investment Forum, we take a look at the recent measures implemented by the Indonesian government as it seeks to improve the country’s attractiveness to foreign investors.
Indonesia’s economy, like many around the world, has been hit hard by the COVID-19 pandemic, shrinking by 2.07 per cent in 2020 – the first annual contraction for Southeast Asia’s biggest economy since the 1998 Asian financial crisis.
Indonesia is now on a major investment drive to boost its recovery and achieve a growth target of around five per cent for this year. Success in meeting its goal will require a profound shift in the country’s investment environment – something the government is trying to achieve through a range of recent policy initiatives.
“Indonesia is an attractive investment destination,” Desra Percaya, Indonesian Ambassador to the UK, told Asia House. “As the world’s fourth largest population and the biggest economy in Southeast Asia, Indonesia is blessed with untapped natural resources, enjoys a demographic bonus, and has a strong domestic market, with a growing middle-and-upper-income class.”
Bureaucratic barriers to investment
Despite Indonesia’s economic strengths, it has previously struggled to attract FDI, even before the COVID-19 crisis. In September 2019, President Joko Widodo (Jokowi) called on his cabinet to do more to support foreign investors after Indonesia failed to attract companies relocating due to US-China tensions, with firms opting for Cambodia, Malaysia, Thailand and Vietnam instead.
Indonesia ranked 73rd out of 190 in the World Bank’s ease of doing business ratings for 2020, behind markets such as Singapore, Malaysia and Vietnam. Infrastructure limitations and red tape are often cited as key deterrents for investors.
Over the last two years, President Jokowi has driven forward a range of new measures that, taken together, suggest Indonesia is serious about moving the dial on investment.
New Ministry of Investment aims to cut red tape
In April of this year, as part of his second reshuffle in four months, President Jokowi elevated the Indonesian Investment Coordinating Board (BKPM) into a ministry, and appointed BKPM chairman Bahlil Lahadalia as the Investment Minister.
The new Ministry of Investment will handle both foreign and domestic investments, with a particular focus on addressing bureaucratic barriers to inward investment. For example, the Ministry will centralise the process for business permits – a key hindrance to doing business in Indonesia. In April, Minister Lahadalia said “holding back someone’s permit is like holding back the national economy,” and the Ministry of Investment aims to address this issue head on. A new online single-submission platform for permits is set to go live in June, catering to both large operators and SMEs.
Omnibus Law could catalyse Indonesia’s electrical vehicle market
The creation of the Ministry of Investment is in part designed to execute some of the reforms specified in the Job Creation Act, also known as the Omnibus Law, which mandates some of the ministry’s measures. The act, which was put into law in late 2020 despite major protests from trade unions, amended more than 75 regulations that have been cited as hindering foreign investment. Some reforms include the simplification of licensing and land acquisition processes, streamlining environmental assessments, and the replacement of the negative investment list (which specifies sectors that bar foreign investment) with a positive investment list.
This new investment list includes 245 ‘priority sectors’, including nickel mining and battery development. Indonesia has the world’s largest nickel reserves, meaning it is strategically placed to benefit from the rise in electric vehicles. It aims to create a self-contained battery industry, with nickel mined, processed and used in batteries built in Indonesia.
Indonesia’s new wealth fund will tackle its infrastructure gap
In February 2021, the government also launched a new sovereign wealth fund – the Indonesia Investment Authority (INA) – which will allow investors to place money in sub-funds to support key sectors such as infrastructure, healthcare, tourism and technology. In April, President Jokowi revised the target for the fund’s assets under management to US$200bn – doubling the goal outlined earlier in 2021 – and highlighted the fund’s flexible approach, saying, “we give investors the freedom to choose whether to invest in the entire portfolio or to choose the thematic funds.” Pledges have already come from fund managers in Canada, Japan, the UAE and the US, the president said, adding details of plans to incentivise sustainable investment in the country.
In the near future, INA’s objective is to draw investment to develop infrastructure (toll roads, airports and seaports), digital infrastructure, logistics, renewable energy, tourism, technology in digital lending and payments, and waste management. Investment in these areas will be crucial in closing Indonesia’s infrastructure gap, which the World Bank estimates to be US$500 billion over the next five years.
Indonesia’s Investment Forum 2021
The above priority areas will be discussed during the Indonesia Investment Forum 2021 (IIF), which takes place digitally on 27-28 May and aims to match foreign investors with owners or operators of prioritised projects in Indonesia. The Forum will commence with a webinar featuring Central Bank governor Perry Warjiyo, the newly appointed Investment Minister Bahlil Lahadalia, and the Coordinating Minister for Maritime and Investment Affairs Luhut Pandjaitan.
Projects that are open for funding and investment discussions during the IIF include the Jakarta Light-Railway Transport and Mass-Rapid Transport; a water management and supply system on Java and Sumatra islands; ports in West and Eastern Indonesia; the shrimp processing industry on Java; and waste management projects on Java and Kalimantan.
“We are interested in drawing in more investment in the manufacturing sector, which includes the pharmaceutical and medical equipment industries; the green economy; sustainable energy including electric vehicle integrated supply chains; connectivity infrastructure; natural resources, including agriculture and fisheries; and investment to speed up the recovery of our tourism sector,” Ambassador Percaya said.
“For UK companies, investing in Indonesia may open opportunities to engage not only with Southeast Asia’s largest companies, but also with other multinational enterprises. We also hope that UK companies can provide more opportunities for transfer of knowledge to the SMEs through partnership and collaboration, as well as enhance Indonesia’s participation in the regional value chain.”
Indonesia is clearly making a concerted effort to improve its investment environment, with the creation of the Ministry of Investment aiming to centralise key processes that, in the past, were at risk of fragmentation across different departments. According to BKPM data, in Q1 2021 investment rose 4.3 per cent annually to RP219.7 trillion, with key Omnibus Law measures being unrolled from February.
In July 2020, the World Bank upgraded Indonesia’s status into an upper-middle income country, strengthening its global standing as a G20 member. Indonesia also maintains an investment-grade rating from international credit rating agencies such as Moody’s, S&P and Fitch Ratings, and has successfully retained its sovereign bond rating throughout the COVID-19 crisis. Furthermore, Indonesia’s total investment realisation, including both FDI and diaspora direct investment, was resilient, increasing from RP817 trillion in 2019 to RP826 trillion in 2020, despite the disruption of the pandemic.
The economy remained in recession in the first quarter of the year, shrinking 0.7 per cent year-on-year and marking the country’s fourth consecutive quarterly contraction as it struggles amid the ongoing crisis. And yet, the pace of contraction is now smaller in Q1 compared to the 2.19 per cent annual contraction in the last quarter of 2020.
Developments in household spending will be particularly influential, given that it is a key driver of economic growth in the country. Five of Indonesia’s 34 provinces, including Jakarta, have increased the minimum wage in 2021, a year after an 8.5 per cent increase across the entire country came into force in January 2020. If these measures contribute to a rise in household spending, Indonesia should see a return to growth in 2021.
If the new government’s initiatives prove successful, and Indonesia moves towards greater ease of doing business and facilitating inward investment, Indonesia’s investment climate may become more attractive, especially given its strong underlying economic fundamentals. This bodes particularly well for the outlook alongside the likely recovery in the domestic drivers of economic growth. Changes in structural policies geared towards facilitating inward and long-term investment will be particularly beneficial for Indonesia in that they will also create resilience to future crises and economic shocks.
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