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Business Updates | Indonesia’s New Economic Package: A Disappointing Start to Deregulation

Indonesia on 9th September 2015 took steps to stem the current slowdown through a formalized plan of action designed to streamline bureaucratic processes and revive economic activity in the real sector. As the first of a three-part series of regulatory reforms slated for implementation over the coming months, the much-vaunted economic policy package has largely been met with disappointment – a consensus reaction evident in the Jakarta Composite Index (JCI) weakening by 0.8% in the immediate aftermath of its announcement. Certainly, a look beyond the buzz words peppered throughout the proposal to appease investors reveals a plan light on concrete details and vague in its effort to deregulate key areas of business.

This is not to say the new economic policy package is not without merit. Success in simplifying Indonesia’s notoriously hazy legal climate through the revision of 134 regulations will have tangible benefits across multiple areas of business. For small and medium enterprises, as an example, the first economic policy package will have a considerable impact on their ability to obtain affordable funding. In this regard, recent policy reform can be viewed as a positive milestone for a cabinet only one month removed from a reshuffle, and should at the very least be credited for making inroads into several hot-button issues including, among others, foreign ownership of property.

Prioritizing domestic support

Headed by the Coordinating Economic Ministry under Minister Mr Darmin Nasution, the first economic policy package goes to considerable lengths to demonstrate that the government’s priority remains the revival of local industries through micro, small, and medium enterprises (MSMEs) that have served as the backbone of Indonesia’s economic growth. As is covered in the government’s overview of planned changes to legislation, more than 209,000 MSMEs nationwide will soon benefit from a 12% interest rate on bank loans – a considerable decline from the previous 22 – 23%. This course of action is in keeping with President Joko Widodo’s public image as a man of the people committed to small business owners and explains the lack of a positive response from the larger business community awaiting similar action, but on a grander scale.  

To be sure, this policy – taken in conjunction with the decision to increase the allotment of rice for the lower income class from a 12-month supply to an amount equivalent to a 14-month supply every year – seems to be a populist move amidst growing public discontent; approval ratings for the President plummeted to 40.7% in July 2015 from 71.73% last year (Saiful Mujani Research and Consulting, Indonesian Survey Circle). Additional policies in the first economic package that are similarly focused include the provision of converter kits believed to save fishery industries’ fuel costs by up to 70% by switching from diesel to LPG as well as faster village fund disbursement totalling up to 20.8 trillion IDR ($1.46 billion USD). Though undoubtedly much needed in spurring wide-spread economic growth, such measures tend to be overlooked among international investors drawn to signs of progress impacting landmark projects as opposed to developments in niche fields (See Action Needed to Put Indonesia's Economy Back on Track).

Also of note is the government’s decision to minimise the burden on the lower to middle class segments of the population through more stable staple food prices to be achieved by exploring alternative countries for cattle imports outside of Australia. In order to do so, President Joko Widodo’s revamped government plans to revise a law requiring a disease-free status by the World Organization for Animal Health on imported livestock, which will potentially jeopardise Indonesia’s current food and mouth disease free status over the long-term (See Indonesia: Short Beef Supply Spells Long-Term Prospects).

Alleviating industry bureaucracy

Central to the government’s first economic policy package is the revision of several regulations with the goal of streamlining complicated processes in domains such as licensing and land acquisition. Among the laws to be amended is Presidential Regulation No. 30/2015 on Land Acquisition for Development Purposes in the Public Interest, which in being simplified should facilitate much needed infrastructure development. As with many of the proposed revisions, however, not much has been made public in terms of clear details, thereby leaving the government with room to manoeuvre in later deciding how to actualize these sweeping statements.

Other initiatives related to the current state of Indonesia’s infrastructure include the deregulation of President Regulation No. 146/2000 on the Import and/or Delivery of Certain Taxable Goods Exempted from VAT, as well as Presidential Regulation No. 64/2012 on Supply, Distribution, and Price Determination of Fuel Gas for Road Transport. Through these revisions, the government is actively seeking to lessen the burden of exorbitant logistics and transport costs. With regards to combating bureaucracy, also of note are amendments to the Ministry of Energy and Mineral Resources’ Government Regulation No. 23/2010 on the Implementation of Mineral and Coal Mining Business Activities, which will cut down time needed for renewal applications including the Mining Business Permit (IUP and Coal Contracts of Work (PKP2B)).

Banking on foreigners

Though primarily focused on catering to the needs of domestic businesses, the first economic policy package does feature a smattering of international-oriented policy shifts. Among the most notable of these is the decision to facilitate foreign ownership of luxury properties for expatriates domiciled in the country. Growing speculation concerning a removal of a blanket ban on foreign property ownership has now culminated in the revision of Presidential Regulation No. 41/1996 on Housing for Foreigners Residing in Indonesia to allow expatriates to purchase upscale apartments valued at a minimum of 10 billion IDR ($698,373 USD) starting in December 2015. Though limited in terms of its potential impact due to the prohibitive price range, this decision can be thought of as a watershed moment in demonstrating that President Joko Widodo’s administration is prepared to pursue policy reform that goes against the nationalistic grain if it means that a key sector will benefit as a result (See Indonesia Opening the Door to Foreign Ownership of Property).

As stipulated under the Financial Authority Service’s (OJK) POJK circular number S-246/S.01/2015, expatriates as well as tourists are also to be given the right to open a savings account effective 15th September 2015 requiring various paperwork such as a passport photocopy, bank references from their countries of origin among other documents for non-Indonesian citizens interested in depositing a minimum $2,000 USD at any bank in the country. It is hoped that the implementation of the policy will help in shoring up the country’s foreign exchange reserves which continue to decrease against mounting pressure on the rupiah (See The Present Plight of the Indonesian Rupiah).

Real reform on the horizon?

In taking stock of the impact of this new economic policy package, it is fair to assert that Indonesia is currently taking baby steps instead of forceful strides in addressing worrying trends in its economy. Still largely ignored in the first policy package are the twin pressures of rising labour costs and energy prices that are eating away at Indonesia’s competitive advantages as a manufacturing hub. Action to address this challenge thus far laid out by the government extends only to reducing the administrative burden on companies through the integration of licensing related to building installation and workplace safety. Clearly, this is a far cry from the decisive measures needed to provide businesses with greater clarity as to what to expect in projecting their operating costs going forward.

Regardless of the size of Indonesia’s gait in delivering much needed reform, however, it cannot be denied that progress, in some shape or form, is being made. Moreover, conclusive judgment as to whether the government has effectively diagnosed and remedied Indonesia’s structural economic ills should be reserved until the release of further details on the second and third policy packages tentatively scheduled for late September and October 2015, respectively. With early reports suggesting that a revision to the Negative Investment List and labour laws may be on the cards as part of the upcoming policy shifts, it is certainly worth keeping an eye on events as they transpire in anticipation of more ambitious reform.

Global Business Guide Indonesia - 28th september 2015

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