Global Business Guide Indonesia

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Business Updates | Third Time’s A Charm – Indonesia Introduces Third Economic Policy Package

Indonesia on 7th October 2015 followed through on its plans to release a third economic policy package, with the intention of building upon the noted success of the preceding package unveiled late last month (See Twice as Nice – Indonesia Unveils Second Economic Policy Package). In continuing the trend towards recovery, this latest collection of regulatory revisions has thus far been met with optimism - as evidenced by a strengthening of the rupiah to below 13,500 IDR/USD and an uptick in the Jakarta Composite Index from 4,487 IDR prior to the policy package announcement to 4,630 IDR less than a week later (12th October 2015).

In addition to providing investors with confidence in the government’s ability to deliver on highly touted economic reform plans and doing so in a timely manner that runs counter to its reputation for slow footed-ness in carrying out policy shifts; the third economic policy package is largely being applauded for its efforts to ensure the cost-competitiveness of businesses in the local manufacturing industry. Such steps are long overdue, given the growing challenge of rising overheads for Indonesian manufacturers, presently culminating in reports of widespread layoffs and in the most extreme circumstances, factory closure.

Cutting costs

Though discourse on the topic of rising production costs for Indonesian manufacturers has in recent months focused on the unsustainably high price of imported raw materials attributed to a volatile rupiah (See The Present Plight of the Indonesian Rupiah), local producers have long had to contend with the more persistent issues of increasing labour and electricity costs (See Labour Pains in Indonesia and Indonesia’s Subsidies on Electricity Powered Down). Despite falling short in addressing the former of these two longstanding problems, the third economic policy package does make considerable gains in cutting costs associated with the latter.

As confirmed by a team of cabinet members led by Coordinating Minister of Economic Affairs, Mr Darmin Nasution, Indonesia will lower its tariffs on electricity by 30% for factories operating between 11.00pm and 8.00am. This course of action not only comes as a relief to local manufacturing industries, but encourages the industrial use of electricity at a time of day in which household use is low – a necessary provision given the country’s still ongoing initiative to match power production with power consumption that has grown exponentially in line with Indonesia’s emergence as the world’s 10th largest economy (See Electrifying Indonesia – Opportunities for Independent Power Producers). Moreover, businesses struggling to cover existing electricity costs stand to benefit from the government’s decision to permit companies in labour-intensive industries to postpone the payment of up to 40% of their total electricity bill until next year. These businesses are also to be offered discounts on the aforementioned bills if they can commit to retaining their workforce.       

Similarly focused policies to reduce energy costs detailed in the third package include lowering diesel fuel prices for both subsidised and non-subsidised types by 200 IDR, as well as reducing the prices of other fuel types such as jet fuel (avtur), 12-kilogram LPG cylinder gas, Pertamax (92-octane gasoline) and Pertalite (90-octane gasoline).

Also of note is the third economic policy package’s inclusion of plans to reduce gas prices for several key industries, set to take effect in 2016. Foremost among the areas of business to be affected is the fertiliser manufacturing industry (See Harvest Time for Indonesia’s Fertiliser Industry), poised to play an integral role in President Joko Widodo’s push to revitalise Indonesia’s agriculture sector and achieve self-sufficiency for a number of staple foods. The price of gas for fertiliser manufacturers is to be tentatively set at $7 USD/MMBTU, while proposed price ranges for the petrochemical and ceramic industries have not yet been made public.

Maintaining positive momentum

Moving beyond its primary focus on reducing costs for manufacturing industries, the third economic policy package seeks to continue to make progress in areas first addressed in the previous rounds of deregulation. In striving to further encourage the deposit of foreign exchange earnings in Indonesian banks, the Head of the Financial Services Authority (OJK), Mr Muliaman Hadad, has decided to increase the number of local banks able to manage these funds. The government has also moved to expand upon its interest rate cut for loans taken by SMEs (from 22% to 12%) to also make individual households and fixed-income employees eligible for the same micro-loan subsidy. In making this decision, the government hopes to open up new pockets of growth and bring about a fresh wave of entrepreneurs contributing to the revival of the real sector.

In tackling bureaucracy and lengthy license processing times (a priority shared by all three economic policy packages), the third package brings about a revision to the Ministry of Agrarian and Spatial Affairs Regulation No. 2/2015. Reform in this domain will see applicants informed of land availability with three hours as opposed to the current waiting period of seven days. Processing time for the issuance or extension of property titles is also to be expedited – a much needed revision to shore up investor sentiment amidst concerns of a slowdown in property sectors including office and commercial real estate (See Indonesia’s Commercial Property Sector in Temporary Slowdown).

Having achieved moderate success in (at the very least) dispelling the notion that the current government is one defined by inaction (See Action Needed to Put Indonesia's Economy Back on Track), Indonesia needs to take advantage of the groundswell of support in realising the somewhat vague promises of deregulation covered in the first package as well as in achieving the more concrete targets presented in the packages that followed. Though more structural reform is undoubtedly needed to ensure that recent progress does not go for naught in turning around the immediate fortunes of a country still positioned for long-term growth, signs suggest that the government has turned a corner in coming to grips with the new economic reality – a development that was long in coming but positive nonetheless.

Global Business Guide Indonesia - 15th October 2015

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Indonesia Snapshot

Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)