Reforms simplify foreign direct investment procedures in Indonesia

Foreign direct investment (FDI) inflows into Indonesia reversed a five-year trend in 2018 when they contracted for the first time in five years, with total estimated FDI inflows estimated to be down nearly 9% year-on-year. The country is facing several challenges as it seeks to boost investment – outward investment from China has been slowing as the country moves to reduce borrowing and capital flight, and despite ongoing efforts by the government of Indonesia to improve the ease of doing business and liberalise new sectors of the economy, the upcoming presidential elections and emerging market jitters in 2018 saw many investors take a wait-and-see approach, which likely also weighed on new FDI. Nonetheless, new bilateral and multilateral free trade agreements could help offset a slowdown in Chinese investment, while ongoing reforms aimed at boosting investment and liberalising the economy will further support an FDI rebound.

FDI Promotion

The government is committed to maintaining a strong FDI growth trajectory, with the administration of President Joko Widodo launching 16 reform and stimulus packages since coming to power in 2014 (see Economy chapter). The aim is to simplify investment procedures and project approvals, expedite the business licensing process, reform the tax system, cut energy prices and modernise wage laws.

The government simultaneously reinforced its infrastructure development agenda to kick-start economic growth, as well as reduce foreign ownership limits for negative investment list industries, including cold storage, crumb rubber processing and tourism, with more revisions expected in 2019.

Many of these reforms were part of efforts to improve the business climate, with the goal of rising to 40th place on the World Bank’s “Doing Business 2019” report, and to boost FDI inflows, which remain stubbornly low by international standards; according to a February 2019 report by Australian-based independent think tank Lowy Institute, annual FDI inflows to Indonesia are equal to less than 2% of GDP, only slightly higher than inflows to Vietnam.

Trend Reversal

According to data from the Indonesian Investment Coordinating Board, total annual FDI inflows rose from Rp270.4trn ($19.1bn) in 2013 to Rp430.6trn ($30.5bn) in 2017. Outside of moderate quarterly contractions in the first quarter of 2016 and the same period in 2017, FDI inflows rose for 20 consecutive quarters, hitting a five-year quarterly peak of Rp112trn ($7.9bn) in the fourth quarter of 2017.

The year 2018 marked a turnaround for FDI growth, however, with inflows contracting to Rp108.9trn ($7.7bn) in the first quarter, Rp95.7trn ($7bn) in the second quarter and a three-year low of Rp89.1trn ($6.3bn) in the following quarter before recovering to Rp99trn ($7.1bn) between October and December. FDI inflows totalled Rp392.7trn ($27.8bn) in 2018 overall, a decline of 8.8% on 2017 levels, with the country missing its total (foreign and domestic) investment target of Rp765trn ($54.2bn), despite a rise of 25.3% in domestic direct investment to Rp328.6trn ($23.3bn).

Contributing Factors

The issues weighing on FDI growth appear to be short term in nature. Much of the decline could be explained by the upcoming 2019 presidential and legislative elections, which has created investor uncertainty and led many to take a wait-andsee approach. Global volatility is also weighing on investor sentiment, with Turkey’s and Argentina’s currency crises of 2018 leading to significant investment outflows from emerging markets. Although the emerging market scare left Indonesia relatively unharmed, it likely contributed to a slowdown in incoming FDI.

An economic slowdown in China also impacted FDI inflows to Indonesia, with Bank Indonesia, the central bank, reporting that FDI from China declined from $507m in the first half of 2017 to $120m in the same period of 2018. This was largely due to reforms by China’s National Development and Reform Commission to reduce capital flight and outward investment.