Indonesia’s Major Reforms to Attract Investors
Indonesia’s Major Reforms to Attract Investors
Indonesia has long been considered “Asia’s next big opportunity” says Kenneth Ng of Asian Discovery, the small-cap specialist. With over 267 million people, it has the world’s fourth largest population, with young demographics (more than two million enter the work-force every year) and abundant natural resources (coal, palm oil, natural gas).
Yet the country has not lived up to its potential due to self-imposed constraints, in particular poor infrastructure, a complex regulatory environment, and unfavourable labour laws.
When Joko “Jokowi” took the presidency in 2014 his first priority was to tackle the infrastructure issue with a $350 billion plan. Notable projects included a network of toll roads connecting all major cities on the island of Java, a new deep seaport, and a mass transit system for Jakarta to help alleviate the capital’s notorious traffic congestion.
Now he has succeeded in getting parliament to pass an Omnibus Bill for Job Creation to reform 79 laws seen to impede the nation’s competitiveness – the next key step to unlocking growth potential.
Labour reforms will be headed by a simplification of severance regulations, which are much tougher than those of its regional neighbours, discouraging businesses from expanding their work forces. The maximum severance payments borne by companies will be reduced from 32 months’ pay to 19.
Other business-friendly measures relating to employment including relaxation of foreign working permits requirement, a lifting of the maximum overtime allowed, and removal of the obligation to provide a two-month break for an employee in the seventh and eighth year of service.
Investors in Indonesia have faced a complicated business licensing process that can take up to two years and is often blighted by local authorities’ rent-seeking behaviour. The process will now be centralized with an on-line submission system. Local rules that conflict with central government regulations will be scrapped.
Access to the Indonesian market will be liberalized by opening up many sectors. In future access will be completely restricted to only six sectors such as narcotics, gambling and casinos, endangered flora and fauna.
To attract more direct investment from abroad, foreigners will be offered special visas for pre-investment visits. Those who invest and stay in the country will no longer be required to have a sponsor or guarantor.
Tax incentives will also be provided to investors who meet certain requirements such as providing technology transfer or investing in labour-intensive sectors. Dividends received by corporate and individual taxpayers will not be taxed if reinvested in Indonesia. Foreign property ownership rules will be relaxed. Foreign buyers with work permits will be entitled to freehold ownership of condominium units priced at $200,000 or more.
Jojowi wants relevant regulations to be drafted within three months and implemented quickly soon after. His plans are designed to achieve economic growth rates averaging 6 to 7 per cent a year this decade, with manufacturing industry targeted to contribute between 21 and 26 per cent of GDP by 2030 and 7 to 19 million jobs created.
The NTAsset Discovery Fund has 22 per cent of its portfolio in Indonesian stocks. Its holdings, all listed in Jakarta, are: ArwanaCitramulia (ARNA), BFI Finance (BFIN), Catur Sentosa (CSAP), Indocement (INTP), Intiland (DILD), Medikaloka Hermina (HEAL), PakuwonJati (PWON) and Surya Pertiwi (SPTO). The contact for further information is <karn@ntasset.com>, tel. +66 2679 6800.
Indonesia’s Major Reforms to Attract Investors taken from our ‘On Target Newsletter’ issue no 261
