Indonesia's government focuses on FDI and reducing the current account and trade deficits

A key goal of Indonesia’s new president, Joko Widodo, is to boost GDP growth to 7% during his tenure, after it fell to a five-year low of 5.02% in 2014. He will face several challenges in this endeavour. Oil and gas revenues have declined on the back of a drop in prices, while falling global prices for other commodities have translated into weaker demand for Indonesian exports. At the same time, Indonesia must work to reduce its trade and current account deficits, while building on recent successes in attracting unprecedented levels of foreign direct investment (FDI).

The new administration’s agenda focuses heavily on “economic diplomacy”, forging stronger bilateral trade ties with the international business community, in addition to reforms aimed at improving the business environment and investment attractiveness. Building on earlier successes as governor of Jakarta, Widodo has already announced plans to increase the number of Indonesian diplomats abroad, while recent legal reforms will support growth in high-priority sectors. However, some provisions of the investment regulations have been cited as overly burdensome for potential investors, raising doubts about the likelihood of meeting bold FDI targets in 2015.

At the same time, this rising emphasis on bilateral trade is expected to impact Indonesia’s future activities as a member of ASEAN, which plans to integrate into a single production base, the ASEAN Economic Community (AEC), by the end of 2015.

Rising FDI

The country has witnessed a sharp rise in FDI in recent years, with the Indonesia Investment Coordinating Board (BKPM) reporting that FDI inflows rose during 14 out of the 16 quarters between 2011 and 2014. According to BKPM, FDI inflows grew by 31% in 2012 to Rp229.7trn ($19bn), from Rp175.3trn ($14.5bn) in 2011, and rose by 17.7% in 2013 to hit Rp270.4trn ($22.4bn). In 2014 FDI inflows expanded by a further 13.5% to reach Rp307trn ($25.4bn), a surprising result considering the lower growth forecasts for the year and ongoing global volatility.

FDI growth was driven by investment in Indonesia’s mining, food, transport and telecoms, electronics and machinery, and chemical and pharmaceuticals industries, which reached $4.7bn, $3.1bn, $3bn, $2.5bn and $2.3bn, respectively, in 2014. The majority of investments were concentrated on Java, the country’s most populous island, where West Java received $6.6bn in FDI, followed by Jakarta ($4.5bn), Banten ($2bn) and East Java ($1.8bn). Outside of Java, the province of East Kalimantan saw the highest FDI inflows, at $2.1bn. According to BKPM, Singapore was the nation’s biggest source of FDI in 2014, with $5.8bn, followed by Japan ($2.7bn), Malaysia ($1.8bn), the Netherlands ($1.7bn) and the UK ($1.6bn).

Economy Diplomacy

When announcing the year’s FDI results, Franky Sibarani, the chairman of BKPM, told media that the board is targeting Rp343.7trn ($28.4bn) in FDI in 2015, a 12% year-onyear increase over 2014. In the mid-term, BKPM has targeted reaching Rp933trn ($77.1bn) in domestic and foreign investment by 2019, of which FDI will comprise Rp570trn ($47.1bn), according to the 2015 National Medium-Term Development Plan.

To achieve this, the new administration has launched a two-pronged economic strategy emphasising enhanced international trade ties to boost Indonesia’s investment appeal, as well as addressing income and social inequality. On Widodo’s agenda is a push for economic diplomacy, with the president announcing plans to send higher numbers of Indonesian diplomats overseas, in an effort to enhance trade ties and attract foreign investment. At the Indonesian Representatives Work Meeting in February 2015, he told attendees that his earlier experiences as governor of Jakarta, in which he boosted tax collection by 35% and launched a Mass Rapid Transit programme, had shown him how important it was to forge strong ties with the international business community.

Asean Impact

With Widodo turning his attention to new bilateral trade agreements, most notably with China and Japan, the future of its ASEAN role has been called into question in recent months.

Despite calls for the Indonesian government to take a more prominent role in ASEAN negotiations, ASEAN prerogatives – including the AEC integration, which is scheduled to finalise by the end of 2015 – have now taken a backseat to the pursuit of national interests. Riza Sukma, a foreign policy adviser for the government, made this clear in December 2014 when he said that ASEAN now represents a cornerstone of Indonesian foreign policy, not the cornerstone, as it did under the previous administration.

Eastern Promise

Though the government plans to maintain the country’s active role in world affairs, foreign policy will now pivot towards South Asia and the Middle East. Widodo’s strategy emphasises enhanced maritime trade ties with India and the Gulf nations, with the foreign minister, Retno Mararsudi, meeting her UAE counterpart, Sheikh Abdullah bin Zayed Al Nayan, in November 2014 to discuss further economic cooperation. The government is simultaneously pursuing new trade with India, announcing plans to restore direct flights between the two nations in April 2015, and targeting the further bolstering of economic cooperation in agriculture, health care and education. This stands in sharp contrast to the IndoPacific trade corridor that was envisioned by Widodo’s predecessor, Susilo Bambang Yudhoyono, when Indonesia was chair of ASEAN in 2011, and could have an effect on AEC integration, with stakeholders already projecting full integration will likely be delayed to 2018, and possibly as late as 2020.

Priorities

Value addition remains a priority for the government, as evidenced by a ban on the export of unprocessed minerals implemented in January 2014. Although these exports brought in an estimated $2bn in revenues each month, the government hopes to establish new processing and smelting facilities to enable exporters to boost revenues while accelerating industrialisation and reducing unemployment.

Manufacturers are also targeting higher FDI inflows, with Mahendra Siregar, then-chairman of BKPM, announcing in September 2014 that he expected Indonesia to build on its recent manufacturing FDI commitments from companies including FoxConn, Samsung, Jollibee Foods and Ichitan Group, all of which have announced major investments in the country recently. Taiwanese FoxConn is particularly significant; a major supplier for Apple, the firm has announced it will build a $1bn manufacturing plant in Indonesia, with company officials telling media Indonesia could soon rival China as an electronics manufacturing centre (see Industry & Retail chapter).

To achieve its 12% FDI growth target, BKPM recommended a number of strategies to the new administration, including establishing a one-stop shop to reduce the time it takes to acquire permits from one year to four months. BKPM also recommended new tax incentives for foreign investors to develop green and renewable energy, including hydropower, geothermal energy and biofuels. Reforms are certainly needed; Indonesia ranked 114th out of 189 economies surveyed in the World Bank’s “Doing Business 2015” report, nearly 100 places behind Malaysia and more than 30 below Vietnam, while it ranked 155th in the “starting a business” category.

One-Stop Shop

The new government has already moved to implement several suggested investment reforms. In December 2014, the authorities launched an online licensing platform accessible to both foreign and domestic investors, and in late January 2015 BKPM announced it had established a one-stop shop for prospective investors. The new scheme, called the One-Stop Integrated Service, will allow investment licences at the national level to be processed under a single institution, BKPM, which is expected to considerably simplify investment licensure. The previously complex procedure had entailed, for example, 52 separate licences which took 930 days to obtain in order to invest in a power plant, with Widodo telling media his administration will not tolerate complex bureaucracy that could harm economic growth.

Under the new system, 22 ministries and government bodies have transferred licensing responsibilities to BKPM, which will issue up to 147 licences covering 1198 business sectors, outside of finance and hydrocarbons. According to media reports, 81 liaison officers have been stationed at BKPM to help streamline the process and expedite licensing procedures. The system is also set to be implemented at the regional level, although as of February 2015 only five provinces and 12 districts had been integrated. The government hopes to increase this to 24 provinces and 120 districts by the end of 2015.

Revised Negative Investment List

Although recent developments indicate the government is on track to achieving its FDI targets, some reforms to the regulatory environment – most notably the publication of an updated “negative investment list”, which identifies sectors in which foreign investment is limited or prohibited – have garnered some criticism.

Under Yudhoyono the negative list was revised over a nine-month period and released in May 2014, meeting with a mixed reception. Revisions to the decades-old negative investment list were intended to attract new FDI, and included opening the pharmaceuticals and advertising sectors to foreign investors. Stakeholders also reacted positively to clarifications stipulating that any sector not identified as either “closed” or “open with conditions” is open to foreign investment, eliminating any uncertainty caused by the previous negative investment list.

Protectionism Problems

At the same time, the list introduced new limits for foreign investment in oil services, retail trade, horticulture and small power plants. Indonesia also moved to restrict foreign ownership of warehousing and cold storage, capping foreign investment at 33%, or a maximum of 67% foreign ownership for cold storage investments located in Kalimantan, Sulawesi, Nusa Tenggara, Maluku and Papua. The new list sets new ownership rules in certain horticultural business lines, which were previously open to a maximum of 95% foreign ownership. The horticultural crops, processing, research, agro-tourism and other business services are now limited to just 30% foreign ownership.

Reuters reported that the move could limit the expansion of agricultural traders already active in Indonesia, including US-based Cargill, Singapore’s Olam International and commodities trader Louis Dreyfus. The new restrictions mean foreign companies will be required to partner with local investors to expand operations, and while the move will support growth in domestic industry, it could be an impediment for overseas firms. The new negative investment list also prohibits foreign investment in small-scale retail businesses (see Retail chapter) in a bid to support local growth, and for the first time limits e-commerce activities to local companies, clarifying previously unclear regulations, although firms will still be able to enter the market via joint ventures of franchise agreements with local partners.

Balancing Act

Indeed, protectionism appears to factor strongly within the new government’s agenda, and the president’s push for economic diplomacy is just one tenet of a four-pillar strategy which also includes the safeguarding of national territory, protecting Indonesian citizens and legal entities overseas, and strengthening the country’s role in the global arena. Now Widodo faces the major challenge of balancing the nationalistic policies that brought him to power with Indonesia’s growing need for FDI.