Investing in ASEAN: Indonesia

Investing in ASEAN: Indonesia

Investing in ASEAN: Indonesia

 

The Republic of Indonesia is the fourth most populous country in the world after China, India and the United States, with a population of approximately 235 million, half of whom are under the age of 30.

 

Spread over some 17,500 islands, the country has numerous cultural and linguistic groups. Bahasa Indonesia is the national language but regional languages and dialects remain important, and English is the most widely spoken foreign language.

 

In 2009, Indonesia was the third fastest growing economy in the G-20, with GDP up 4.5%, and was the only G-20 member to lower its debt to GDP ratio. Indonesia’s economy continued to surge ahead in 2010, with growth in the fourth quarter up 6.9% year-on-year, and 6.1% for the full-year. The Economist Intelligence Unit has forecast average growth of 6.3% from 2011-2015.

 

EAGLES, CIVETS & MIRACLES

 

With this strong performance, Indonesia is being increasingly recognized as one of the world’s most important and dynamic markets. Goldman Sachs has included the country in its list of the ‘Next Eleven’ and it has been included in the ‘Emerging and Growth-Leading Economies’ (EAGLES), a term coined by Spain’s BBVA banking group, as well as the ‘CIVETS’ – a list of leading emerging economies compiled by The Economist that includes Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa, and whose combined Gross Domestic Product is predicted to account for half the global economy by 2020.

 

Around the mid-1960s, Indonesia’s economic situation was in alarmingly bad shape, suffering badly from the chaotic political course set out by president Sukarno, Indonesia’s first president. Economic matters took a back seat for Sukarno, who had spent a lifetime fighting in the political arena. Among his accomplishments were cutting off of links with the west (thus isolating Indonesia from the world economy and barring it from receiving much needed foreign aid money) and deficit spending through the printing of money, resulting in hyperinflation. But after Suharto took over from Sukarno in the mid-1960s, economic policies underwent a radical change for the better.

 

President Suharto’s ‘New Order’ government during 1966-1998 was characterized by rapid economic growth and a remarkable reduction in poverty. These two achievements were the reason that Indonesia became known to the west as an ‘Asian Miracle’ in the 1980s and 1990s.

 

Positives & Negatives

 

“What are Indonesia’s strong points that explain increasing foreign investments and the recent macroeconomic growth?” asks Indonesia Investments.

 

  • Abundant and diverse natural resources
  • A young, large and burgeoning population
  • Relative Political stability
  • Prudent fiscal management since the late 1990s
  • Strategic location in relation to the giant economies of China and India
  • Low labour costs

 

The report goes on to say that “Indonesia, a market economy in which the state-owned enterprises and large private business groups play a significant role, shows a number of highly positive features at the beginning of – what can become – a period of substantial economic development. However, it should also be pointed out that Indonesia is a complex country that contains certain risks.” These include:

 

  • Infrastructure: The lack of sufficient quality and quantity of infrastructure has been barring economic and social development from reaching its full potential.

 

  • Demonstrations: One feature of an open democratic society, they take place almost daily, albeit usually on a small-scale.

 

  • Corruption: Corruption here has never impressed in Transparency International’s ‘Annual Corruption Perceptions’ Index.

 

  • Governance: Apart from the issue of political corruption, there are other factors that negatively influence the effectiveness and performance of good governance.

 

  • Natural Disasters: Earthquakes, tsunamis, volcanic eruptions and floods are all phenomena that make the headlines in this island nation.

 

  • Ethnic and Religious Violence: Indonesia has witnessed sustained outbursts of violence throughout its history, but it has flared up since the late 1990s.

 

  • Radical Islam: While the majority of the country’s Muslim community can be regarded as moderate and tolerant, there has always been radicalization on the fringes.

 

“Indonesia has withstood the global financial turmoil partly on the back of its exposure to strong commodity prices but also an advantageous demographic (a large and young population with a fast-growing middle class), macroeconomic stability, a relatively open investment environment and generally low cost structures,” says PwC Thailand in its report South East Asia – Investment Opportunities, Tax & Other Incentives, adding that “the government has promoted fiscally conservative policies, resulting in a low debt-to-GDP ratio and fiscal deficit and a manageable rate of inflation. As a result of this, Indonesia regained its ‘Invest’ grade rating in 2011. As a founding member of the organisation, Indonesia is committed to ASEAN’s goal of liberalising trade and investment. The government has set out a ‘Master Plan for the Acceleration and Expansion of Indonesian Economic Development’ until 2025, looking to stimulate investment in Indonesia’s six economic corridors (Sumatra, Java, Kalimantan, Sulawesi, Bali-Nusa Tenggara and Papua-Maluku) and in eight growth industries (mining, energy, agriculture, industry, marine, tourism, telecoms and other ‘strategic areas’)”.

 

PwC says that the government has acknowledged its under-spending on capital investment in prior years and recognises that significant investment in infrastructure, such as energy facilities, seaports, railways and roads, is now

required. This has led to the establishment of the Government and Private Sector Cooperation Centre to facilitate cooperation in infrastructure projects between the government and private sectors.

 

The report also points out that “the investment regulations in Indonesia continue to be complex and bureaucratic. A number of significant recent regulations have been imposed with little or no warning (including in the mining sector), causing some degree of unease among investors”.

 

Nevertheless, the country’s growth rate, which has remained at between 5% and 7% for the majority of the last ten years, combined with the opportunities for investment – particularly in the consumer, resources and infrastructure sectors – has seen Indonesia become increasingly attractive to foreign and domestic investment.

 

The country is rich in natural resources including oil, natural gas, coal, tin, and copper, and the energy development and mining sectors have been significant drivers of growth and employment. Like most of its fellow ASEAN members, Indonesia has been experiencing a shift from the historically dominant agricultural sector to industry and services.

 

The PwC report points out that “this growth has not necessarily been shared, as Indonesia still has a high incidence of poverty, at about 12% (although this is falling). But like many of its ASEAN peers there is a growing middle class eager to spend and enjoy the fruits of economic prosperity”.

 

Doing Business in Indonesia

 

Most income generating investments will require the incorporation of an Indonesian limited liability company or Perseroan Terbatas (PT). Investment through a PT must be in accordance with investment regulations administrated by the central government and the Investment Coordinating Board (“BKPM”). These regulations include restrictions around investments with foreign shareholders including the percentage of holdings in PT companies that can be held by foreigners. A “Negative Investment List” setting out excluded or restricted investment areas has been prepared by BKPM and is updated periodically.

 

Opportunities

 

“Overall,” says PwC, “the government of Indonesia, through BKPM is very encouraging of foreign investment particularly in relation to infrastructure, agriculture, manufacturing and energy”.

 

“Infrastructure spending in Indonesia (both government and private) has remained subdued since the 1997 Asian Economic crisis,” says a 2013 report from KPMG, one of the largest professional services companies in the world and a ‘Big Four’ auditor. “As a result Indonesia continues to have poor basic infrastructure and remains under invested. Population pressures and strong interest of foreign investors in Indonesian commodities gives rise to a significant need for infrastructure development in the country, which has a congested road network, over utilized airports, weak rail connectivity, low electrification rate and an underdeveloped port sector”.

 

Now the country is looking to develop 20,000km of roads, 15,000MW of power plants, as well as a number of ports and oil refineries over the next 5 years, and roughly two thirds of the expected USD160 billion of capital required for these projects is expected to come from private sources – largely foreign.

 

Incentives

 

“Investment Law No.25/20o7 was a landmark regulation,” says PwC, “designed to re-set the general terms of investment in Indonesia (the earlier version was over 30 years old). The basic investment policy is equality of treatment for foreign and domestic investors, and that the government should provide investors with legal certainty, business certainty, and business security to any investors from the licensing process up to the end of the investment activity”.

 

The government also provides protection from nationalisation (unless required by law, when the central government will provide compensation), and investors are given the right to freely transfer and repatriate foreign currency in the form of, among others, royalties, dividends, loan repayments, sale of investments and management and technical service fees.

 

The Investment Law also introduced a number of investment ‘facilities’ (or incentives) for qualifying investors, including tax holidays: the government may grant corporate income tax holidays or reductions to companies investing in ‘pioneer industries,’ which are defined as “industries that have extensive links, give additional value and high externality, introduce new technologies, and have strategic value for the country’s economy.”

 

The Investment Landscape

 

“Indonesia has historically been plagued and associated with weak institutions and myriad other problems, being one of the countries hardest hit by the 1997 Asian Economic crisis, which caused a major recession, widespread civil unrest, sectarian violence and resulting socio-economic fallout,” says KPMG. “Today, Indonesia is a politically stable democracy, has enjoyed sustained periods of record economic growth and foreign investment, as well as now being the largest economy in South East Asia. However the country is still not without the need for significant policy reforms and various challenges remain, with new ones emerging”

 

“Indonesia welcomes foreign investment on its own terms,” is how KPMG puts it. “Government policies aim at ensuring that foreigners work with Indonesians to assist in the development of the country’s economy and skill-base. There is a general recognition that Indonesia needs the development capital, and the technical and management skills of foreigners”.

 

Categories: ASEAN, Indonesia

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