Global Business Guide Indonesia

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Business Updates | Twice as Nice? – Indonesia Unveils Second Economic Policy Package

Indonesia on 29th September 2015 announced its latest round of economic policy revisions to counter the market’s present slowdown. Unlike the first set of reforms introduced earlier this month (See Indonesia’s New Economic Package: A Disappointing Start to Deregulation), the second economic policy package has been largely well-received and serves as a much-needed win for a government that has been criticised for its passivity in facing mounting challenges to the country’s continued growth (See Action Needed to Put Indonesia’s Economy Back on Track).

The success of the second economic policy package in boosting investor sentiment – evidenced by a 1.41% rise in the Jakarta Composite Index at close of trade – has in part been attributed to a tighter focus on a handful of measures to be carried out by the Investment Coordinating Board (BKPM), Bank Indonesia, the Ministry of Finance, and the Ministry of Environment and Forestry. This stands in stark contrast to the first package (which mandated the revision of 134 regulations through the combined efforts of 17 government bodies) and as such comes across as a plan of action that can more feasibly be implemented. Of greater importance in eliciting this positive reaction, however, is the second package’s substance and move beyond vague references to deregulation. In demonstrating its support for key industries and in taking steps to slow the rupiah’s decline, the government has through its most recent economic policy reform provided hard figures and clearly-defined incentives.

Tax relief for transportation industries

Among the second economic policy package’s most notable revisions is the removal of value added tax (VAT) for businesses in transportation manufacturing. As will be confirmed by the issuance of a new government regulation, imported components and equipment (including spare parts) used in the shipyard, railway and aircraft industries are now no longer subject to VAT; thereby lowering production expenses for manufacturers that are central to Indonesia’s efforts to lower prohibitively high logistics costs (See Indonesia’s Logistics Sector).

Though important to the realisation of high-profile railway projects such as the recently green-lighted Jakarta – Bandung railway to be developed by China, this tax incentive stands to have the biggest impact on Indonesia’s maritime industries and their ability to propel the archipelago nation into a major shipping power (See Indonesia’s Maritime Ambitions Require Massive Upgrade of Seaports). Plans to upgrade and construct a total of 24 seaports over the next five years taken in conjunction with the continued enforcement of cabotage laws (See Cabotage Timetable for Offshore Vessels in Indonesia) should serve as a driving force behind a new wave of demand for locally manufactured ships. Similar tax exemptions already in place for shipyards in the Batam Special Economic Zone have seen businesses in this field flourish, and it is hoped that the second economic policy package will therefore bring about a more widespread development of the shipbuilding industry across Indonesia (See Indonesia’s Shipping & Shipyard Industry).

Also indicative of Indonesia’s move to address its well-documented logistics challenges is the second economic policy package’s unveiling of plans to develop bonded logistics zones in Cikarang, West Java and Merak, Banten. As was detailed by Finance Minister Mr Bambang Brodjonegoro, the former will serve as a storage facility for manufacturing industries and house raw materials, capital goods and intermediary goods (Jakarta Globe, 30th September 2015). Businesses that set up in the bonded zones will benefit from the close availability of inputs, thereby lessening their exposure to burdensome transportation costs, as well as from several tax facilities including the right to postpone import duty payments and exemption from VAT and sales tax on imported intermediary goods. The Merak Bonded Zone is to primarily function as a storage hub for fuel logistics.

Industrial zone incentives

The second economic policy package is perhaps drawing most attention in both local and international spheres for its inclusion of a plan to significantly clamp down on the bureaucracy that plagues Indonesia’s business licensing processes. In contrast to the broadly-worded references to streamlining in the first package, the most recent reform puts in place concrete guidelines and timeframes with none more attention-grabbing than the BKPM’s initiative to implement a three-hour license facility for major investors in industrial zones. Made available to companies making a minimum investment of 100 billion IDR and/or intending to employ more than 1,000 workers, this facility stands as a marked improvement upon processing time for principle business licenses, local company deeds, and taxpayer numbers which typically take upwards of a week to complete. Moreover, businesses that set up in an industrial zone meeting the aforementioned criteria will be exempted from the need to obtain the 11 permits required to begin construction and can therefore avoid an additional waiting period that can take up to a cumulative 526 days, as per a press release circulated by the Coordinating Ministry of Economic Affairs.

Similar cuts to licensing processes are to be delivered by the Ministry of Environment and Forestry, in its plans to shorten the permit issuance period to three to five days for forest area exploration and to 12 days for production. Furthermore, the issuance of a permit for forest area use must now be completed within 12 to 15 days – a somewhat lofty goal given that the average permit issuance took between two to four years to complete prior to the second economic policy package announcement. In an attempt to reach its target, the Ministry of Environment and Forestry will be trimming the total number of licenses for the forestry sector from 14 to six.

Empty promises or promising solutions?

Much remains to be seen as to how the government goes about turning these proposed reforms into reality. Being able to shore up investor confidence through the announcement of plans to curb bureaucracy is a noteworthy accomplishment, but it is another challenge altogether to ensure that the positive sentiment persists as a result of the actualisation of said plans. The proposed magnitude of cuts to license/permit processing time should be taken with a healthy dose of skepticism among even the most optimistic of observers, particularly when taking into consideration as to whether Indonesia will be able to follow through with its boldest plans. The country’s recent track record in centralising processes through the creation of a one-stop shop for licensing at BKPM certainly suggests that patience and a long-term mindset will be needed for those seeking to take advantage of new regulations introduced by the second policy package.

Pointing out potential pitfalls is not meant to serve as a criticism of the second economic policy package, but should instead function as a reminder to investors to stay abreast of supplementary information that will shed light on whether the reforms are plausible. As confirmed by the Coordinating Minister of Economic Affairs, Mr Darmin Nasution, this phase of the three-part policy package will be announced in stages, on a sector by sector basis. Moreover, it can be concluded that taken as a whole, the latest batch of regulatory shifts has thus far had its intended impact. In addition to triggering a rise in the JCI, the second policy package’s introduction of tax cuts on foreign exchange earnings deposited in local banks – coupled with Bank Indonesia’s even more significant move to step up intervention in the forwards market – saw the rupiah strengthen by 0.2% to 14,651 IDR to the dollar on 30th September 2015. Clearly, the government has picked up some momentum in working to revive the economy and in doing so must now contend with growing expectations for the third policy package, heightened by the fact that core issues related to labour laws and the Negative Investment List remain as of yet unaddressed.

Global Business Guide Indonesia - 1st 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)