New stimulus packages aim at economic liberalisation in Indonesia

In a bid to support flagging economic growth, the administration of President Joko Widodo has rolled out a host of stimulus packages in recent months, offering support to critical industries, investment incentives and regulatory reforms aimed at greatly improving the ease of doing business.

Arguably one of the most important of these changes was an adjustment to the list of industries closed to foreign investment, as highlighted by the country’s “negative investment list”, which was revised in February 2016, to allow foreign investors access high-potential segments including e-commerce, road infrastructure and cold storage.

Other key measures offer tax incentives and support for small and medium-sized enterprises (SMEs), as well as improvements to shipping and logistics efficiency, particularly at ports. Through these measures, the government hopes to see private sector investment become a major economic growth driver for the country, although concerns about the timely implementation of the new measures remain.

Widodo Agenda 

After rising to power and winning the presidential elections in late 2014, Widodo announced a number of ambitious economic targets, including hitting annual GDP growth of 7%, supported by economic liberalisation and a government investment programme that will significantly improve infrastructure and transport networks.

He took the reins at an interesting time. Global oil prices were in a freefall by the end of 2014, allowing his administration to cut extremely expensive fuel subsidies that had long burdened annual budgets. At the same time, commodities prices, including minerals and palm oil, were concurrently slowing down as a result of weakened demand in China. GDP growth slumped to 5% in 2014 and hit a six-year low of 4.79% in 2015 as export revenues tumbled. Currency depreciation, meanwhile, impacted manufacturers and industry in the wake of softening domestic demand.

First Package 

In a bid to support the economy and bolster GDP growth, the government began announcing a series of planned stimulus packages in late 2015, starting with the September 2015 announcement to boost industrial competitiveness through three new policies emphasising deregulation, red tape reduction, and enhancements to law enforcement and business certainty.

On making the announcement, Widodo told media that as part of the first policy, the government had restructured 89 out of a total of 154 regulations under investigation for being inefficient, including duplicate and overlapping regulations. The measures will be reformed to strengthen coherency and consistency, while others that are impeding industrial development will be removed.

The second new policy will reduce the amount of time necessary to acquire land and permits for new projects, as well as speeding up procedures for the procurement of land, goods and government services. Under this policy, regional governments are expected to play a larger role in developing and advancing infrastructure projects that are of national strategic importance, according to Widodo.

The third policy will focus on new investment in Indonesia’s property sector, with the government expected to push for increases in the supply of low-income housing, while also widening investment opportunities in real estate (see Real Estate chapter).

Taxes & Transport 

The first stimulus announcement clearly signalled the government’s intent to support economic liberalisation and investment growth, and was quickly followed by seven additional stimulus packages unveiled before the end of 2015, focusing on tax and energy tariff cuts, wages, small business lending and private investment in oil (see overview).

The ninth stimulus package, released in January 2016, focused on improving the country’s transportation and logistics network, another critical area as Indonesia seeks to attract investors. The package, unveiled in January 2016, included plans to create a single billing system for port services conducted by state-owned enterprises, integrate a national single-window system at ports across the country, and remove the price difference between private and state postal services. It also included plans to introduce mandatory use of the Indonesian rupiah for transportation-related payments.

Negative Investment Reforms 

The 10th stimulus package, announced in February 2016, is likely to have the most significant impact in improving the country’s investment climate. This includes a new policy which will remove the foreign ownership cap for 35 businesses on Indonesia’s “negative investment list”, a group of industries in which the government has prohibited majority foreign ownership including restaurants, bars, cafes and certain e-commerce companies. The coordinating minister for economic affairs, Darmin Nasution, told media that foreigners can now hold a 100% stake in tourism-related businesses including bars and restaurants, art and entertainment firms, and sports centres, although the ownership cap for spas remained at 51%.

Other businesses that have been opened up to foreign investment include crumb rubber, cold storage, telecoms equipment, testing facilities, non-hazardous waste management and disposal, and perhaps most critically, toll road concessions, medicine and the manufacturing of raw materials.

The e-commerce segment could see a surge of investment, after the government stipulated that web-based marketplaces with over Rp100bn ($7.3m) can be fully owned by foreigners, in addition to production companies, which had previously been closed to foreign investment. The government will also allow foreign investors to hold up to a 67% stake in health support services, 49% in land transportation and 49% for the installation of high-voltage electricity.

Investment Benefits 

Enabling foreign investment in toll road operations and cold storage is expected to provide an important boost to the government’s ambitious infrastructure agenda, which envisions construction of a $1.54bn highway linking East and West Java, as well as reducing port dwell times and enhancing logistics networks. With the manufacturing sector still heavily dependent on the import of raw materials for production (see overview), enabling foreign investment in raw materials production should also assist the country’s struggling exporters, which have been hit by weakening demand in China and currency depreciation.

Upon making the announcement, Nasution stipulated that industries that are now 100% open to foreign investors will no longer need to partner with a local company, although industries related to local SMEs will. This is expected to help create more local jobs, improve the competitiveness of local companies, and to also foster greater technology transfer and increased innovation.

Continued Agenda 

The government appears committed to continuing its stimulus agenda, announcing the 11th and 12th stimulus packages in March and April 2016, respectively. The 11th package, presented by Nasution, offered a lower tax rate for property purchased by domestic real estate investment trusts (see Real Estate chapter), in addition to the harmonisation of Customs checks across the country’s ports network, which is meant to reduce dwell times from 4.7 days to 3.7 days. SMEs are targeted again in the 11th package, which also offers subsidies for loans taken by export-oriented SMEs. The government also unveiled plans to draw up a roadmap for Indonesia’s pharmaceutical industry in a bid to steer sustainable long-term growth.

The 12th package maintained a strong focus on SME support, as well as improving the ease of doing business. As with its first stimulus package, the government announced it had removed a number of permits and procedures required to start a small business, in addition to reducing the costs of obtaining a business licence. According to Nasution, the number of procedures required to establish a business was cut from 94 to 49, while the number of permits required was reduced from nine to six. Both of these moves are expected to reduce the amount of time required to open a business in the country. This wave of stimulus packages is perhaps the clearest indicator that the Widodo administration is working hard to deliver its “big bang” economic liberalisation agenda.