Economic reforms should help Indonesia maintain momentum

Long considered South-east Asia’s economic powerhouse, Indonesia has seen growth decelerate in recent years as commodities prices fall and demand in China weakens, while currency depreciation in light of US monetary easing has impacted its manufacturing and industrial sectors, as well as small and medium-sized enterprises (SMEs).

Although President Joko Widodo has launched reforms aimed at boosting both foreign direct investment (FDI) and domestic consumption, rising government spending on an ambitious infrastructure agenda, first announced in 2014 following a move to slash costly fuel subsidies, will be seriously challenged by lower-than-expected government revenues, while domestic consumption, long a key economic driver, is moderating as a result of a weakening labour market and exports. Falling global oil prices led to a removal of oil subsidies, which freed up new fiscal space in 2015. However, a concurrent decline in prices for commodities such as palm oil and minerals brought growth to a six-year low that year, with forecasts for 2016 remaining subdued in the wake of ongoing global uncertainty.

Reform Agenda 

The growing recognition that economic liberalisation offers the best path forward for the country has been reflected in a number of recent reforms, including a spate of significant stimulus packages that were announced in late 2015 and continued into 2016. These actions have been further supported by an increasingly accommodative monetary policy, implemented after the rupiah rallied from a two-year tumble to become Asia’s best-performing currency. Successful implementation of a long-awaited economic liberalisation agenda will be critical in meeting the country’s long-term growth targets, although rising investment in value-added and labour-intensive industries is expected to continue, bolstered by an ambitious agenda and measurable improvements to the ease of doing business.

Background 

Indonesia is South-east Asia’s largest economy, with a 252m-strong population – the fourth largest in the world – that has long acted as a strong domestic growth driver. The country has recorded remarkable economic growth since the 1997-98 Asian financial crisis, with gross national income per capita rising from $560 to $3630 between 2000 and 2014, according to the World Bank.

GDP growth has not dropped below 4% annually since 2001 and stood at 4.63% in 2009, 6.22% in 2010, 6.17% in 2011, 6.03% in 2012, 5.58% in 2013 and 5.02% in 2014, according to World Bank statistics. In 2015 GDP growth stood at 4.79%, according to Statistics Indonesia (BPS). In 2015 Indonesia was the world’s 10th-largest economy in terms of purchasing power parity, and had reduced its poverty rate from more than 50% in 1999 to 11.2% in the same year.

Although agriculture and fisheries had traditionally dominated production and growth in Indonesia, manufacturing has since risen to become its primary economic pillar, accounting for Rp613trn ($44.7bn), or 20.8% of GDP, in the first quarter of 2016, according to data from BPS. This was followed by agriculture at Rp399.6trn ($29.2bn), or 13.6%; retail trade and vehicle repair at Rp394.2trn ($28.8bn), or 13.4%; construction at Rp321.8trn ($23.5bn), or 10.9%; and mining and quarrying, including oil and gas activities, which contributed Rp200.7trn ($14.7bn), or 6.8%.

Growth Strategy 

For years Indonesia’s economic planning has been guided by a 20-year development plan, the Master Plan for Acceleration and Expansion of Indonesia’s Economic Development (MP3EI), which runs from 2005 to 2025 and is divided into five-year periods. Under MP3EI the country has targeted becoming one of the world’s “developed” countries by 2025, with projected per capita income of between $14,300 and $16,000, up from $3630 in 2014. The government also hopes to see total GDP rise from current levels of $800bn to between $4trn and $4.5trn by 2025. MP3EI forecast real economic growth would average between 6.4% and 7.5% between 2011 and 2014, and targeted inflation in the range of 3% by 2025, from an average of 6.5% between 2011 and 2014. Under its most recent five-year plan from 2015 to 2020, the government will focus on infrastructure development and improvements to education and health care.

Widodo came to power in the 2014 presidential elections and announced an ambitious economic strategy that emphasised industrial development, achieved through the nine-pillar national development agenda known as Nawa Cita, and the National Medium-Term Development Plan (RPJMN) 2015-19, which emphasises economic liberalisation, infrastructure investment and job creation (see Trade & Investment chapter). Less than a year after taking office, Widodo told media that his growth strategy emphasised deregulation to create competition, efficiency and better services, as well as focused on infrastructure development. However, his government has struggled to disburse funds for roads, ports and utilities developments. Red tape and political infighting have also delayed development on many big-ticket items (see Transportation chapter), while the commodity price collapse has threatened exporters, and the mining and petroleum sectors. Rising political support and a Cabinet reshuffle in August 2015 have assisted the liberalisation agenda, and Widodo’s administration has since moved to launch 12 stimulus packages. These include regulatory reforms, tax breaks, lower fuel prices and electricity tariffs, measures designed to speed up the delivery of a massive infrastructure programme, and initiatives to support SMEs, exporters and industrial investors.

Recent Growth 

However, Indonesia will face considerable challenges as it seeks to meet its growth targets. Falling commodities prices, which had previously played a major role in the country’s economic boom, have seen GDP growth slow from 6.22% in 2010 to a six-year low of 4.79% in 2015, while growth of fixed investment, exports, and perhaps most critically, consumption, has also slowed, according to the World Bank. Indonesia’s economy rose by 5.04% in the fourth quarter of 2015, the strongest quarterly performance of the year. Expansion was driven in large part by government spending, enabling the highest quarterly growth rate since the first quarter of 2014.

The World Bank reported that a significant external adjustment was recorded in 2015, as Indonesia’s current account deficit narrowed to 2.1% of GDP, compared to 3.1% in 2014. BPS reported in January 2016 that after three years, the country’s trade balance finally swung into the black, with BPS data showing that Indonesia’s trade surplus rose to $7.52bn in 2015, after recording a $1.88bn deficit in 2014. However, both BPS and the World Bank reported that this improvement was due to a significant import contraction as a result of falling oil and gas prices, with export revenues concurrently declining by 14.4%. Growth in the fourth quarter was challenged by a 6% real exchange rate appreciation, which weighed further on exports, and a year-on-year (y-o-y) decline in both goods and service exports accelerated.

Falling Exports 

Exports manufacturing was the biggest contributor to Indonesia’s economic decline in 2015, falling by 13.4% y-o-y as commodity prices continued to fall. Commodities prices have fallen by 70% since their peak in 2011, while oil and gas, coal and palm oil prices all fell by 42.1%, 26.5% and 19.3% y-o-y, respectively, in 2015, according to the World Bank. The country’s financial account balance also declined in 2015, with capital inflows falling by 62% to $17.1bn in 2015, compared to $45bn in 2014. Global volatility moderated towards the end of 2015, with net portfolio inflows rising to $4.8bn in the fourth quarter of that year, of which $3.5bn was invested in a government global bond. In March 2016 BPS reported that Indonesia’s GDP growth had reached 4.92% in the first quarter of 2016, falling just short of analyst projections of 5%, but still outpacing the first quarter of 2015, when growth stood at 4.73%.

Domestic Demand 

With a population of over 250m, and a solid track record of strong recent economic growth, Indonesia’s rising middle class incomes have become the largest economic growth driver in the country, accounting for 57% of GDP in the first quarter of 2016. Household consumption has remained steady despite recent economic challenges, with BPS reporting that consumption growth was 5.01% in the first quarter of 2015 and 4.92% in the fourth quarter of 2015. Meanwhile, government spending growth jumped from 2.71% in the first quarter of 2015 to 7.31% in the fourth quarter of 2015, before falling to 2.93% in the first quarter of 2016.

However, domestic demand has been impacted by the economic slowdown, and BPS reported that household consumption stood at 4.94% in the first quarter of 2016. This is cause for concern, argued the online trade and investment news outlet Indonesia Investments, in May 2016, because inflation has moderated from highs of 8.4% in both 2013 and 2014, to 3.4% in 2015, and averaged 4.15% during the first quarter of 2016, while lower energy prices, particularly following government moves to reduce diesel and gasoline prices in October 2015, should have boosted spending and consumption.

However, economist Lana Soelistianingsih, speaking to Indonesia Investments, noted that in recent years slowing household consumption was common during the first quarter, while Ramadan and the Eid al-Fitr holiday, as well as the start of a new school year, have generally driven up spending during the second and third quarters. Tirta Segar, an official at Indonesia’s central bank, Bank Indonesia (BI), also told the publication he expected household consumption to improve as inflation is contained and wages increase.

Stakeholders have also warned that BI’s decision to keep interest rates high is weighing on domestic growth. Rates were set at 7.5% for most of 2015, and inflation remained persistently high until late in the year, which had an effect on consumption, although the bank has since moved to cut rates twice since the start of 2016, signalling a shift toward pro-growth monetary policy in a bid to bolster investment.

Government Spending 

In place of domestic consumption, economic growth accelerated as a result of increased government spending and gross fixed capital formation. In 2015 government spending rose by 7.11% in the third quarter and 7.31% in the fourth quarter, and was at 2.93% growth in the first quarter of 2016, according to BPS data, while gross fixed capital formation rose from 4.79% in the third quarter of 2015 to 6.9% in the fourth quarter. Local media have reported that both components rose as a result of government efforts to enhance infrastructure development across the country, with progress made on a number of planned projects during the second half of 2015, including power plants, toll roads, smelters, bridges and railways.

In its March 2016 quarterly economic update on Indonesia, the World Bank wrote that central government investment rose by 42% y-o-y in 2015, with expenditure shifting from poorly targeted fuel subsidies, which were removed in early 2015 as a result of plummeting oil prices, creating fiscal space for public investment. It also wrote that in 2016, a fiscal stimulus would be necessary to support economic recovery, recommending that the country preserve capital spending to generate a fiscal deficit of 2.8% of GDP, and cut non-priority expenditures. However, it noted that fiscal expansion alone would not be enough to raise growth above 5%, making improved private sector participation and investment a critical priority.

Original Budget 

In October 2015 Indonesia’s House of Representatives approved the 2016 state budget. The original approved budget forecast Indonesia’s budget deficit would rise to 2.15% of GDP, from earlier projections of 1.9%, although still well below the 3% threshold that is stipulated under the Indonesian constitution. Total state revenues are projected to hit Rp1822.7trn ($133.1bn) during the 2016 fiscal year, while government spending will reach Rp2095.7trn ($153bn), of which 20% will be allocated to education and 5% to health care. The government is also planning to inject Rp48.4trn ($3.5bn) into its substantial portfolio of state-owned enterprises (SOEs) for further business expansion, with 24 SOEs set to benefit, although these funds will not be disbursed until mid-2016. The current budget targets 5.3% GDP growth in 2016, and that the rupiah will trade at Rp13,900 to the US dollar, while inflation targets are set at 4.7%. However, in February 2016 officials announced plans to revise a number of macroeconomic assumptions set in the approved 2016 state budget, with projected oil prices for Indonesian crude hovering around $50 per barrel. Benchmark oil rates fell to less than $30 per barrel in January 2016, and uncertainty remains over whether a long-called-for production cut from the Organisation of the Petroleum Exporting Countries would come to be. Although Indonesia is a net energy importer, oil and gas revenues comprised 1.1% of GDP in 2015 – compared to 3.4% in 2012 – according to the World Bank, necessitating an adjustment to planned revenue structures and budgetary spending. The former minister of finance, Bambang Brodjonegoro, reported that a weakened oil price assumption would also result in a lower assumption for non-taxed revenue and income tax from the oil and gas sector.

Government revenue realisation was well below the target in 2015, with the World Bank reporting that revenues reached Rp1504trn ($109.8bn) in 2015, Rp258trn ($18.8bn) below the revised target, and 3% lower than in 2014. Lower oil and gas revenues contributed a significant portion to this decline, while tax revenue collection fell short of targets by Rp249trn ($18.2bn), despite rising by 8.5% in 2015.

Tax Collection 

Indeed, improving the government record on tax collection will be critical for revenue growth, although recent moves to limit tax evasion through a proposed Tax Amnesty Bill have stalled, creating doubts as to whether the 2016 targets are feasible. BPS reported that tax revenues comprised 79% of government revenues in 2014, largely sourced from corporations that pay a 25% income tax, although Brodjonegoro announced in April 2016 that the government plans to cut the corporate income tax rate to 20% in 2016, making the country more competitive and attracting new FDI. Indonesia’s individual income tax base is extremely small, however, with just 30m citizens registered as taxpayers in 2014, representing roughly a quarter of the total workforce, and individual rates ranging between 5% and 30%. Such a small individual tax base has translated into extremely low personal income tax revenues – just 0.4% of total tax collection – while less than 2% of registered taxpayers were reported to have paid the appropriate taxes in 2014.

Tax Challenges 

Although Widodo has targeted raising income tax revenues to 16% of GDP, compared to around 10% in 2013, and despite collection doubling between 2009 and 2014, the government has failed to meet its tax collection targets for seven consecutive years, recording shortfalls of Rp34.3trn ($2.5bn), Rp11.4trn ($832.2m), Rp6.1trn ($445.3m), and Rp49.7trn ($3.6bn) in 2009, 2010, 2011 and 2012, respectively. The situation has worsened in recent years, with the gap between target and realisation rising to hit Rp78.9trn ($5.8bn) in 2013 and Rp87.5trn ($6.4bn) in 2014, and jumping to an eight-year high of Rp238.7trn ($17.4bn) in 2015, with Rp1055.6trn ($77.1bn) of tax revenues realised, against a target of Rp1294.3trn ($94.5bn).

In April 2016 the Ministry of Finance (MoF) again announced plans to revise the 2016 budget, after recording weaker revenues than anticipated, with plans to cut spending by Rp50.6trn ($3.7bn). Brodjonegoro told media that the government’s revenue shortfall was driven largely by weak tax revenue collection, with revisions to inflation, exchange rates and oil prices targets also expected.

According to Brodjonegoro, the tax collection shortfall is expected to reach Rp67.6trn ($4.9bn) in 2016, while projected oil prices will need to be revised to $35 per barrel from $50. As a result of these amendments, the country’s budget deficit is expected to widen in 2016 to 2.5%, with oil and gas revenues now forecast to fall by Rp25trn ($1.8bn). A somewhat piecemeal and contradictory approach is creating some confusion, however; just a day prior to its April budget revision, the government announced plans to increase non-taxable personal income limits from Rp36m ($2630) to Rp54m ($3940). Indonesians earning less than Rp50m ($3650) annually were also granted a two-year income tax amnesty in December 2015, although this could have a positive impact on domestic consumption and consumer spending, which will put another dent in tax revenues. Despite this, the 2016 tax collection target remains in place at Rp1360.1trn ($99.3bn) worth of tax revenue, a 28.9% increase over 2015’s total realisation.

Amnesty Law 

The government has unveiled a host of initiatives to solve the problem, beginning in December 2014, when the MoF and Coordinating Ministry for Economic Affairs met to relax hiring regulations at the Directorate General of Taxation (DGT), and later moved to inject $426m into the MoF in its revised 2015 state budget, to be used for DGT reforms, including salary increases and the hiring of 4000 new personnel to its existing 36,000.

Outside of ramping up domestic tax collection efforts, the government is also increasingly targeting wealthy Indonesians holding money offshore, with The Economist estimating in April 2016 that Indonesians have an estimated $900bn concealed overseas.

In January 2016 a novel and somewhat controversial approach was launched to improve tax collection efforts. The Widodo administration announced plans for a Tax Amnesty Bill, in which those with assets hidden abroad would face no criminal prosecution or penalties when repatriating their money, apart from a fee ranging between 1% and 6% of the assets in question – 1% for those who bring their money home immediately, and 6% who take more than nine months – compared to a flat rate of 30% for top earners. The government initially projected that it would earn up to $15bn in additional revenue, according to the Economist, although delays to the passage of the proposed act, coupled with concerns that it rewards tax evaders, have raised doubts about the viability of the plan. Indonesia’s House of Representatives was still deliberating on the bill as of mid-2016.

Investment-Based Economy

Although ensuring efficient disbursement of state infrastructure funding, raising purchasing power and boosting household consumption will be critical to maintain economic momentum in 2015, long-term growth ultimately depends on increasing private investment in the economy. Indonesia’s history of protectionism and vested interests have been a hindrance to trade and investment growth in recent years, with the country’s negative investment list standing as an impediment to many potential investors.

Although the negative investment list was revised in May 2014, many viewed the move as less investor-friendly. Even as the pharmaceuticals and advertising sectors opened to foreign investors, new limits were announced for investment in oil services, retail, horticulture and small power plants. The country has also restricted foreign ownership in warehousing and cold storage – vital links in an already underdeveloped logistics network – to 33% and 67% for cold storage investments in Nusa Tenggara, Sulawesi, Kalimantan, Maluku and Papua. Horticultural investment limits were set at 30%, and restrictions on small-scale retail projects and e-commerce were also introduced.

Indonesia’s investment climate has increasingly come under scrutiny in recent years, with the World Bank reporting that although it is generally positive, it faces regulatory uncertainties and high logistics costs. Foreign firms have increasingly complained about mounting restrictions on their operations, according to the Wall Street Journal in February 2016, and the government has moved in recent years to restrict foreign investment in oil and gas services, in addition to rolling out non-tariff barriers, and has also introduced regulations requiring foreign mining companies to divest to minority stakes.

In February 2016 Reuters reported that FDI into Indonesia remains among the lowest in South-east Asia in relation to GDP and total investment, and foreign investors have pushed for better access to investment opportunities over the years.

Stimulus Relief 

With revenues expected to underperform in 2016, and the recognition that more investment is needed for robust economic growth, the government has moved to address these challenges with a series of stimulus packages that include regulatory reforms, having already released 12 between September 2015 and April 2016. Offering a host of reforms spanning everything from income tax breaks, improvements to the ease of doing business, fuel prices and foreign investment, and emphasising SME support, credit growth, domestic consumption and export growth, these packages indicate progress on government plans for economic liberalisation.

The first stimulus package was launched September 9, 2015, when the government unveiled two new policies aimed at reducing red tape, improving efficiency and streamlining the process of establishing a business in the country. The second package, announced September 29, 2015, targeted export growth and investment, and introduced interest rate tax cuts for exporters, a streamlined investment procedure for new projects in industrial estates, and a relaxation of import taxes for capital goods in industrial estates and the aviation industry. In a government shift away from restricting investment in natural resources, new measures also included cutting the number of permits required for mining exploration.

Rising Investment

The impact of these first two packages is measurable. In January 2016 the Indonesia Investment Coordinating Board (BKPM) reported that in rupiah terms, FDI rose by 19.2% y-o-y in 2015 to hit Rp365.9trn ($26.7bn), and by 2.6% in US dollars to hit $29.27bn. According to BKPM, the fourth quarter of 2015’s 26% y-o-y increase in FDI was a result of stimulus measures undertaken by the government. Total foreign and domestic investment rose by 17.8% y-o-y to Rp545.4trn ($39.8bn), enabling BKPM to meet its target of generating Rp519.5trn ($37.9bn) in 2015, excluding investment in the banking and oil and gas sectors. Manufacturing, in particular, was a success story, with total investment rising by 43.4% y-o-y, according to BKPM (see Trade & Investment chapter).

A focus on attracting new investment was apparent in subsequent announcements, and the sixth, seventh and eighth stimulus packages, announced in November and December 2015, each focused on new investment incentives and tax cuts. The sixth package, for example, established new tax incentives for investment in special economic zones (see Industry chapter), and the seventh eliminated income tax for workers in labour-intensive industries.

Energy Reforms 

Labour-intensive industries welcomed news of the third package, unveiled in October 2015, which cut energy tariffs in addition to expanding an existing micro-lending programme for SMEs and simplifying the land acquisition process, which has long been a major challenge for investors. The package also lowered the prices of some fuels, including jet fuel, 12-kg liquefied natural gas canisters, 92-octane “Pertamax” and 90-octane “Pertalite”, in addition to cutting diesel prices from Rp6900 ($0.50) to Rp6700 per litre ($0.49). The price of gasoline, known locally as premium, was not adjusted.

Under the reforms, the price of gas consumed by industrial companies will be set according to the purchasing power of the fertiliser industry, around $7 per million British thermal units, although other industries, such as petrochemicals and ceramics, will have prices set based on their specific industry. Industrial electricity tariffs were cut, with the government offering a 30% discount to those using power between 11pm and 8am, while labour-intensive sectors have been afforded a grace period to delay paying up to 60% of total power bills until 2016.

Wages & Deregulation 

The fourth stimulus package focused on the labour market, introducing a new system to calculate annual minimum wage increases, which will be based on local inflation and GDP growth rather than a cost-of-living index. This is expected to limit some of the sharp wage increases witnessed in some provinces in recent years.

The fourth package, meanwhile, was announced on October 15, 2015, and seeks to enhance ongoing efforts to deregulate various economic sectors, and included a package which obligates companies to revalue their assets to better reflect the impact of inflation and rupiah depreciation, which is expected to help firms boost their financial performance and records keeping. Companies will also benefit from a lighter tax cash flow burden following the evaluation process, according to BKPM.

The fifth package, announced on October 22, 2015, will also eliminate double taxation for investment funds in real estate, property and infrastructure, which could provide a welcome shot in the arm to the country’s sluggish property market (see Real Estate chapter), although its scope is still relatively limited given liquidity challenges on the Indonesian Stock Exchange. The third part of the fifth package will see deregulation within the Islamic banking segment, which will simplify the regulatory and licensing procedures for sharia-compliant banking and financial products. Under the new regulations, the licensing process will no longer require individual applications for product issuance approval, but instead through a formal, codified framework (see Banking chapter).

Infrastructure 

Addressing a long-standing infrastructure deficit, which has driven transportation and logistics costs to some 27% of GDP, according to the World Bank, is another critical priority, with the bank estimating that bringing these costs down to 16% of GDP, as is the case in Thailand, would allow the country to save $80bn annually.

The government certainly recognises the importance of new infrastructure investment, as evidenced by measures contained in the ninth and 11th stimulus packages. The ninth package, announced in January 2016, envisioned the establishment of a single billing system for port services conducted by SOEs. International consultancy KPMG estimates Indonesia will require $70bn of infrastructure investment in the near term in order to better manage the traffic congestion in major urban centres, as well as ports and airport delays, while the Asian Development Bank (ADB) has forecast the country needs 10 times that amount to meet long-term transportation demand.

The Jakarta Post reported in March 2016 that more than 1000 km of toll roads will begin construction over the next five years, averaging 200 km of construction annually through to 2019, at an estimated cost of Rp128.7trn ($9.4bn). The new government has significantly ramped up its efforts to deliver multi-billion dollar projects since coming to power, earmarking Rp313.5trn ($22.9bn) for infrastructure development in the 2016 budget, the highest outlay ever allocated for the sector. Key projects expected to break ground include nearly 770 km of national roads and 11,642 new public housing units, with the government moving to implement a new system under which tenders for these projects are issued earlier in the year to boost budgetary disbursement earlier in the year (see Construction and Transport chapters).

Under the RPJMN, the government plans to pave 2650 km of new roads and complete maintenance on an additional 46,770 km of existing roads; build 15 new airports; construct 24 seaports; and establish a 3258-km rail line linking Java, Sumatra, Sulawesi and Kalimantan, which will include 2159 km of intercity railway track and 1099 km of urban rail lines.

The plan will also see construction of 49 new dams, 515,711 affordable housing units, two new oil refining units with capacity of 300,000 barrels per day each and power plants adding 35,000 MW to the national grid. Progress on these projects will be critical given current global and regional volatility, with construction efforts expected to have a noticeable impact on economic growth in Indonesia.

PPP Solution 

Financing these projects poses a challenge for the government, with lagging revenues already expected to impact spending in 2016. Although international development commitments, including ADB’s move to triple its budget for Indonesia to $12bn in 2015, will certainly help, the government is also targeting new private sector investment, particularly under a public-private partnership (PPP) model, as the best solution to its infrastructure challenges. A number of agencies and policies have also targeted PPPs in recent years.

The National Development Planning Agency, which sets growth targets and contributes to budget policy, has published a PPP book containing a list of potential projects every year since 2009. PPPs also factor prominently in the MP3EI, which envisions cooperation between central and local governments, SOEs and the private sector.

Expansion 

Yet Jakarta Post reported in May 2015 that while the Indonesian government has been pro-PPP on paper since the early 2000s, few projects have actually been delivered outside of toll roads and the power sector. Even in those cases, most projects were awarded to state-linked enterprises, making efficient development of new infrastructure PPPs an important priority. A number of challenges remain, including difficulties in obtaining necessary land, permits and approvals, as well as access to finance for major planned projects. Raising private capital for projects in Indonesia is also considered to be extremely difficult, with restrictions including high interest rates, collateral requirements and a widespread institutional unwillingness to match the loan tenor, standing as major impediments to private investment.

PPP Reforms 

Regulatory reforms should improve the situation. In January 2015 the government established a new PPP unit, which specialises in mitigating financial risks from PPP projects, in addition to helping develop PPPs using the country’s Project Development Facility and viability gap funding to guarantee private sector credit.

In July 2015 Widodo issued Presidential Decree No. 38-2015 on PPPs, creating a mechanism for performance-based annuity schemes under which the government shoulders the bulk of the project risk and makes payments to private contractors based on delivery and performance. “The regulatory framework for PPPs is important, but trust between the public company and private company is probably the most crucial component of making these partnerships work,” Johanes Mardjuki, managing director of Java Integrated Industrial and Ports Estate, told OBG.

Although weaker-than-forecast government revenues forced a budget revision in April 2016, the government remains committed to rolling out infrastructure projects. Global Trade Review reported in April 2016 that the Adaro consortium was close to finalising a $3.2bn deal for the Batang power project, to be delivered under a PPP model, with the deal expected to be signed in mid-2016. The Japan Bank for International Cooperation has agreed to provide 48% of the financing under the proposed agreement, while commercial banks will provide a further 32%.

Negative Investment Revision

Steps to open infrastructure development to the private sector have also been supported by recent policy decisions. One of the most important stimulus measures was delivered in February 2016, when the government unveiled what Widodo described as a “big bang” relaxation of restrictions on foreign investment across 49 different sectors. Encapsulated in the 10th stimulus package unveiled by the government, the plan will open sectors including e-commerce, highway construction, retail, health care and tourism industries to foreign investment, and stands as the farthest-reaching of all 12 plans unveiled so far (see analysis). In some cases, limits on foreign stakes have been increased from a minority to a majority, which should also help Indonesia comply with “equity caps” restrictions encapsulated under the Trans-Pacific Partnership, a major planned Pacific Rim free-trade agreement that the government has said it plans to join (see Trade & Investment chapter). The revision to the negative investment list is therefore viewed as a clear sign of Widodo’s commitment to advancing an agenda of economic liberalisation.

Outlook 

Although the government stimulus and an anticipated surge in investment driven by pro-business reforms should ensure robust long-term economic growth, China’s economic slowdown and depressed commodities prices will continue to weigh on the Indonesian economy through 2016.