All of the pieces are in place – economic momentum, a young population, increasing digital connectivity, rising disposable income. Indonesia is on course to become the world’s fourth-largest economy as early as 2030. Opportunity abounds, and following President Joko Widodo’s re-election in 2019 it’s going to get a whole lot easier for investors to make the most of these investment opportunities.
Historically, it has been difficult for foreigners to invest in Indonesia. The country’s top-heavy bureaucracy fostered arduous application and decision-making processes for even the simplest license or permit. Meanwhile, restrictions on foreign investment sometimes prohibited even the most determined investors from achieving their goals. The Negative Investment List, for instance, outlined several industries where foreign investment was partially or wholly restricted.
Despite restrictions, Indonesia had a reputation for welcoming foreign investment in the 1980s and early-1990s. Investment appetite was solid until the Asian Financial Crisis of 1997 sent foreign investors running for the hills. Indonesia took the hardest hit in due to weak regulatory and legal framework, massive foreign debt and an asset bubble, which in turn set the stage for the inward-looking and protectionist policies put in place prior to Joko Widodo administration.
Those policies kept foreign investors at bay and limited the country’s growth potential, but the election of President Joko Widodo – affectionately known as Jokowi – in 2014 ushered in an administration set on opening the country to foreign investment and driving growth.
Building an Investment-Friendly Environment
Since taking office in 2014, Jokowi has enacted several reforms to make Indonesia’s investment opportunities more attractive and accessible. The president released 16 economic reform packages covering hundreds of regulations from 160 ministries during his first term to combat bureaucracy.
The latest reforms launched in November 2018 included measures to permit increased ownership by foreign investors in 54 business sectors. Among them were several pockets of the manufacturing, technology and medical sectors. This is the first change to the Negative Investment List since 2016 and allows for full ownership in 25 sectors including transportation and telecommunications.
The reforms also included new tax holiday regulations aimed at increasing new capital investments in pioneer industries to stimulate economic growth. The reforms added the digital economy and agricultural sectors to the list of pioneer industries – an attempt to drive investment to areas that provide strategic value for the economy. Investments of IDR100-500 billion ($7.2-$36 billion) are eligible for a 50% tax holiday for five years, while larger investments can secure a 100% tax holiday for longer periods.
The addition of new Special Economic Zones (SEZs) – areas that are open to foreign investment and offer investors access to preferential regulatory infrastructure and taxation – is another area where Jokowi has made investing in Indonesia easier. Already in 2019, Indonesia has added three new SEZs which are expected to spur investment and create 120,000 jobs in East Kalimantan, North Sulawesi, and North Maluku by 2025.
To accelerate investment, the government launched the Online Single Submission (OSS) system in 2018. Designed to do away with lengthy bureaucratic processes, the system reduces the need to complete piles of paperwork that previously undermined the realization of direct investment. Before OSS, investors had to bounce back and forth between officials at several government institutions when securing permits and licenses. Now they can obtain several permits including business registration numbers and operational permits online within a matter of hours. The government plans to roll out an upgraded version of OSS to drive further synchronization and coordination between government ministries and institutions.
Reaping the Benefits of Reform
Reforms have paid off. The major ratings agencies raised their ratings on the country’s sovereign debt to investment grade for the first time since the Asian Financial Crisis. Reforms saw Foreign Direct Investment (FDI) reach IDR393 trillion ($27.2 billion) in 2018, up 28% since Jokowi took office. The trend remains strong in 2019 with investment realization posting a 5.3% on-year increase in the first quarter.
Even the country’s financial markets are trending. Foreign investors pumped $986 million into Indonesian equities in January, the biggest monthly inflow in nearly two years. Bank Indonesia recorded a record $6.44 billion in capital inflows into government debt and equities in the first quarter leading up to the election in April.
Meanwhile, the world has taken note of government measures to streamline licensing and registering a business, improve access to credit, reduce the business start-up fees. Indonesia has rapidly advanced in the World Bank’s Ease of Doing Business rankings as a result, climbing 33 spots over the course of four years to secure 73rd place in 2019. Under the Vision Indonesia 2045 plan, the government aims to break into the top 10 by 2045.
To be sure, there’s still much work to be done. Yet Jokowi’s re-election in 2019 gives him the mandate to pursue tougher reforms outlined during his campaign, which bodes well for Indonesia’s economy and foreign investors who want to tap into the country’s rich potential. Looking ahead, Jokowi plans to tackle the country’s high current-account deficit, shutdown redundant government agencies and get rid of rules that hinder new investment. If Jokowi delivers on his promises, it will bring the country closer to its projected future as one of the world’s leading economies.