Impetus for reform: Changes are set to open new sectors to greater foreign investment

Slower growth in Indonesia may provide an impetus to realise a range of reforms that the government is planning, changes that could open several important and attractive sectors to greater foreign investment. On November 6, 2013 the Indonesia Investment Coordinating Board (BKPM) announced plans to allow foreign investment in airports and ports, and to ease restrictions in the telecommunications and pharmaceuticals sectors. The announcement came just hours after official figures showed GDP growth had slowed for a fifth consecutive quarter, albeit to 5.62% – still impressive by global standards.

Loosening Restrictions

The BKPM’s chairman, Mahendra Siregar, told reporters the government would allow foreign firms to hold stakes of up to 100% in airports, airport services and ports, while permitting 49% ownership of freight terminals. Currently, state-owned firms Angkasa Pura and Pelindo own and operate airports and seaports, respectively. With Indonesia planning to open 24 new airports by 2015, private capital and management expertise could help support expansion. Local press reports suggest that restrictions on foreign investment in financial institutions, tourism, health care and advertising could also be loosened.

However, Sofjan Wanandi, chairman of the Indonesian Employers’ Association, told local press restrictions could yet be imposed on retail and logistics, in which foreign ownership of 100% is allowed. Further details have yet to be released, but on December 5, 2013 Mahendra told the press that President Susilo Bambang Yudhoyono had promised his advisers the reforms would be finalised as soon as possible.

News regarding the reforms is long awaited. The BKPM was due to revise the so-called negative investments list (DNI), which sets limits on foreign ownership of assets in various sectors, in 2013, but this had not been finalised as of early 2014. The list was last modified in 2010, easing restrictions on investment in education, construction, health care, postal services and telecoms, while tightening some other requirements.

Slowing Growth

The renewed sense of urgency about the DNI revisions may be partly associated with the upcoming parliamentary and presidential elections, but most media reports suggest that it is mainly driven by concerns over slowing growth. While GDP expansion of more than 5% may be high by global standards, Indonesia remains a relatively poor country with a large and growing population, and the government wishes to continue delivering higher incomes and more jobs. One of the reasons for sluggish growth is lower investment. In the third quarter of 2013, realised investments grew 22.9% year-on-year, according to Indonesia Investments. This may seem high, but it is low compared to recent performances – and realised investments grew just 0.7% quarter-on-quarter in third-quarter 2013.

Challenges

A number of factors are acting as a drag on growth, including inflation, weak external demand, higher interest rates and a depreciation of the rupiah. All are affecting investor confidence. In 2013 the country saw an outflow from its financial markets of $1.4bn to early December, compared to a $1.7bn inflow in 2012. A recent survey by the British Chamber of Commerce Indonesia found that 60% of respondents remained confident about their business in the country, down from 83% in 2012, while the chamber’s ease of doing business rating fell from 65% to 50%.

In an increasingly competitive environment, in which many emerging markets are seeking investment to drive growth, even Indonesia, with its large and growing domestic market, ample resources and strategic location, cannot rest on its laurels. As the IMF said in an August 2013 report on the country, “More intense structural reform efforts are needed to reduce supply bottlenecks, broaden the export base, and bolster medium-term economic and employment growth… the main priorities continue to be accelerating infrastructure investment, creating a more open and predictable trade and investment regime.” Encouraging foreign investment in key sectors such as transport and communications would be an important step in the right direction.