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Successfully investing in Indonesia

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last updated on 20 June 2022 | reading time approx. 4 minutes

 

 

 

How do you assess the current economic situation in Indonesia?

The Indonesian economy has developed dynamically in the last ten years, achieving growth rates of approx. 6 per cent. In 2020, though, there was a negative GDP growth of around minus 2 per cent due to the Covid-19 crisis. In 2021, however, GDP grew slowly back again by 3.7 per cent.

 

In particular, labor-intensive industries such as tourism and textiles have been severely affected by the pandemic – but they are slowly recovering. The economic decline was rather moderate in a regional comparison, as other ASEAN countries are more closely integrated into international supply chains than Indonesia.

The economy is still struggling with some problems, especially a cumbersome and non-transparent bureau­cracy, underdeveloped infrastructure in large parts of the country and a serious shortage of a skilled workforce in some sectors of industry. In November 2020, an omnibus bill entered into force, which aims to facilitate the investment and business climate in the archipelago by amending a number of existing laws, among others in the fields of tax, employment and investment. The Constitutional Court ordered the government to revise this law, but the basic facilitation of investments has not changed.

 

How would you describe the investment climate in Indonesia? Which sectors offer the largest potential?

In view of the positive pre-pandemic economic development and positive growth forecasts, which are also likely to be boosted by post-pandemic catch-up effects, Indonesia has increasingly come to the attention of foreign investors in recent years. The country is rich in natural resources, has a large domestic market and growing technological needs. Major target sectors for medium-sized foreign direct investments in Indonesia include especially – in addition to infrastructure – mechanical engineering, metal and electrical industries.

Indonesian investment promotion schemes are comparable to those of other countries in the region. In particular, there are tax reductions, tax exemptions for certain “pioneer industries”, an extended loss carry forward up to ten years and the possibility of duty-free imports of machinery, goods or production materials for certain industries and service sectors. Criteria are also comparable with those in other ASEAN countries: Investments in remote provinces, high number of employees, technology transfer, advantages for the Indonesian economy or society and export orientation. Since 2020, these incentive schemes are being further expanded for some sectors in the context of the Covid-19 crisis.

 

What challenges do German companies face during their business ventures into Indonesia?

Indonesia faces deficits in the area of infrastructure, especially in electricity generation and transport (roads, railways, seaports and airports). Depending on the specific location, this can pose challenges especially to production facilities. In addition, the Indonesian legal system often appears non-transparent and somewhat obscure to German entrepreneurs since it is influenced by various legislations. Restrictions on foreign investment are imposed by specific regulations, which limit foreign investment in certain business sectors in order to protect the national interest and the domestic economy. Considerable problems in business practice so far also arose from the restrictive employment law, which shall now be mitigated by the revamped employment regulations in connection with the omnibus law. It remains to be seen how the regulations amended at the end of 2020, particularly in the area of investment law and their implementing provisions, some of which have not yet been finalized, will play out in practice.


Despite the trend encouraging more equal treatment of foreign and domestic investment, there are still restrictions on foreign investment in some sectors of the economy. Furthermore, some business sectors may also be restricted by way of specific laws or regulations. However, we see a general trend of liberalisation through the omnibus law and its investment related implementing regulations.
 
Many foreign investors also complain about the long duration of administrative procedures to obtain licenses required for the operational business of a newly established company. The government addressed the problem at the end of 2018: Via the OSS (Online Single Submission) portal, required registration and licensing procedures can now be carried out digitally, which has since noticeably reduced processing times.

In recent years, Indonesia has extended the scope of its import barriers and non-tariff barriers to trade in some areas. The opening of negotiations over a Free Trade Agreement between the EU and Indonesia, which, among others, aims to reduce trade barriers, was announced on 18 July 2016. The tenth negotiation round for the “Comprehensive Economic Partnership Agreement” (CEPA) was held in late February 2021 via video-conference.

 

President Joko Widodo is taking various measures to improve the investment climate in Indonesia and boost the economy. What opportunities do you see for foreign investors?

On 2 February 2021, Indonesia’s President Joko Widodo has enacted Presidential Regulation No. 10 of 2021 concerning Investment Business Fields (“Regulation No. 10/2021”), which entered into effect 30 days later on 4 March 2021. These implementing regulations refer to the Job Creation Law, which is commonly known as “Omnibus Law” and entered into effect on 2 November 2020. This legal instrument aims at attracting investment and stimulating the economy by i.a. simplifying the licensing process and harmonising various business related laws and regulations that are deemed to be obstructive towards foreign investments. Differently from the previous approach of listing businesses that are closed to foreign investments, Regulation No. 10/2021 provides a positive list approach, stipulating that all business activities are now open for foreign investment unless      

  • regulated otherwise or
  • they may only be carried out by the Indonesian Government.

 

Interesting changes in Regulation No. 10/2021 appear in the fields of distribution services which previously were only permitted to foreign investment to a narrow extent. Now, wholesale distribution without affiliation to production is fully open for foreign investment. Also retail and commission agency service has now been opened more for foreign investment.

In some fields we still see a certain protectionism; in particular, some sectors are reserved for local cooperatives or micro/SMEs. It remains to be seen to what extent procedural simplification will result for the registration and licensing of foreign investments, as general experience with the new administrative practice is still lacking.


In your opinion, how will Indonesia develop?

During the first term of office of Joko Widodo, Indonesia appeared relatively stable both democratically and economically and was able to develop positively as an investment location. It seems that this stability has been maintained and that the economic framework conditions will be further liberalised in the medium term. However, due to internal party pressure, the president's policy also reveals protectionist elements. E.g., the local production of industrial products is to be strengthened and particularly large scale foreign investments are likely to be approved in Indonesia; a minimum capitalisation of 10 bio. Indonesian Rupiah generally needs to be planned for this purpose. It remains to be seen how Indonesia will position itself among other ASEAN investment destinations as a result of the omnibus law on investment facilitation, which came into force at the end of 2020. Planned measures to address infrastructure deficits will only be partially pursued in 2021, as their financing has been impaired in light of significant government aid programs for industries affected by the pandemic.

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