Indonesia Rising

In the South East Asian context, Indonesia is hard to ignore. It makes up around half of the entire population of the Association of Southeast Asian Nations (ASEAN) and produces half of ASEAN’s total gross domestic product. On the world stage, it’s the same story. Indonesia is the eighth largest economy on the planet and is the only ASEAN country that is also a member of the G-20 major economies. It has a ripening domestic market, with the consuming classes set to triple by 2030. According to a recent report by the United Nations Conference on Trade and Development, Indonesia is one of the top three most attractive destinations for multinational companies for 2014-2016, and it isn’t hard to see why. 

Aside from its economic credentials, Indonesia boasts a successful democracy that promises stable growth prospects. The peaceful transition of power after the July 2014 elections boosted investor confidence. The rise of President Joko Widodo, or Jokowi as he is commonly referred to, signifies a change from the politics of the old establishment. The international media loves to describe Jokowi as the humble son of a timber collector, who made his fortune by building an export business from scratch. During his presidential campaign, Jokowi made personal visits to disadvantaged communities in an effort to win over the working class. It paid off. He is seen by many as a leader of the people who will challenge corruption and usher in an era of more progressive reform. 

This is significant, considering that certain policies implemented by the previous government were of increasing concern to potential investors in Indonesia. In recent years, the resource-rich nation has seen a rising tide of protectionism and confusing and overlapping regulations. Since at least 2012, Indonesia has increased trade regulations in an effort to bolster domestic industry and create jobs. It started with limits placed on the import of horticultural products and finished goods. Then in 2013, a limit was placed on foreign ownership of banks, to the frustration of many. Last year, the government even banned the export of unprocessed minerals, and it remains to be seen what effect this will have on the economy. Furthermore, the government operates a strict immigration policy which can restrict access to expatriates. For example, foreign workers in the oil and gas industries must be below 55 years of age. 

In contrast, some of the Jokowi government’s initial policies show a concerted effort to win over foreign investors. Firstly, Jokowi is trying to do something about Indonesia’s infamously impenetrable bureaucracy. Power is extremely decentralised across the country’s numerous islands, and lengthy application processes for business licenses at both national and provincial levels used to be a significant barrier to foreign enterprises. For most companies in the service industries, the process took approximately two years; but for those in the heavy industries, the wait for permission to start operations could be as long as four years. Since January 2015, however, the Indonesian central government, via the Indonesian Investment Coordinating Board (BKPM), has been rolling out what it calls a “one-stop service”: a single, online service for investment licensing at the national level that aims to be more transparent and efficient about processing times. At the same time, the BKPM also announced a tax cut for oil and gas firms, in an attempt to revive the country’s oil production, which has been declining over the past two decades.  

The countless islands that make up the Indonesian archipelago also present another challenge: infrastructure. Businesses are often hampered by the cost of air travel, which is the only feasible method of transport between many of Indonesia’s islands. And due to poor development of the country’s ports, it can be cheaper to ship goods from Indonesia to Europe, than it is to ship them within Indonesia itself. In November last year, in a bold move, Jokowi cut fuel subsidies, which had previously consumed one-fifth of the national budget, and pledged to redirect the funds into infrastructure projects. If these projects are successful, it will not only help to reduce the cost of logistics for prospective foreign businesses, but it will allow domestic companies to fully exploit their own resources, and therefore further strengthen the wider economy. -

However, some investors are extremely suspicious about Indonesia’s ability to deliver on its promises. 

For example, there are doubts surrounding the implementation of the BKPM’s one-stop service, which is only available for licenses required at the national level and does not offer licenses for every type of business activity. Provincial licenses still have to be applied for via multiple ministries, and the chairman of the BKPM, Franky Sibarani, has said that the integration of local governments will not be finalised until 2016. It remains uncertain whether some provincial authorities will ever cooperate with the BKPM at all. In 2001, regional reforms gave some provinces greater administrative and legislative autonomy than others, and in 2003, Aceh province was able to introduce a form of Sharia law that is not adhered to elsewhere in the country. There are also doubts about the actual spending of the funds liberalised from fuel subsidies. As of April 2015, the government had reportedly only spent 2 percent of its annual budget for infrastructure, with much of it being tied up in excessive red tape and alleged mismanagement. In 2014, Transparency International rated Indonesia worse than India and China for the perceived severity of public sector corruption. In addition, the current government is continuing to hinder foreign trade, even when it simultaneously seeks to promote it. For example, in January 2015, the government introduced a surprise decree which banned the sale of beers and pre-mixed alcoholic drinks in small shops nationwide. Conservative government forces that wish to curb drinking habits were said to be behind the ban. As at March 2015, PT Multi Bintang Indonesia, which brews and distributes beers in on behalf of Western companies such as Diageo and Heineken, had seen its share price fall 20 percent since the ban. This experience suggests that economic liberalism is still not a top priority for Indonesia.  

However, for those who wish to take the risks, the rewards can be abundant. Although it is often perceived to be dependent on commodities or manufacturing exports, in fact,Indonesia’s economy is currently being largely driven by domestic consumption. This is driving strong growth for many Western conglomerates in Indonesia, such as Unilever and Nestlé. Many UK brands are also well established there, including Rolls Royce, and GlaxoSmithKline. Even retail companies such as Marks & Spencer, Topshop, and Ted Baker are beginning to make their mark. Experienced foreign investors working in the country say that this is often largely down to finding the right local partner. 

Opportunities abound where any investor is willing to make the leap. But Jokowi’s government still has a lot to do if it wants to sustain investor confidence. Commitment to a consistent economic policy would be a sensible start. Protecting national interests doesn’t mean resisting foreign investment. Jokowi also has to make sure he can guarantee economic growth in the long term, and an increase of FDI inflows can surely do no harm.