Indonesia's big moment

Indonesia has had some tough breaks in 2018. First the devastating earthquakes on the island of Lombok in August killed hundreds of people, then two months later, a massive tsunami washed over Palu on the island of Sulawesi, leaving thousands dead or missing.

These disasters occurred against the backdrop of a very mixed economic picture. FDI appears to be picking up again in 2018, having hit decade lows in 2017, while capital committed to greenfield projects in 2018 has already hit $31.5bn, according to greenfield investment monitor fDi Markets, up from $9.6bn the previous year. However, presidential elections in 2019 and uncertainty in the global economy are putting pressure on flows, with many investors adopting a ‘wait and see’ attitude ahead of a potential change in government.

“We did the comparison with the previous elections in 2014 and 2009; of course the FDI is a little slow,” says Bambang Permadi Soemantri Brodjonegoro, Indonesia’s former finance minister and current minister of national development planning. “At the same time, if you look at household consumption, there was an increase every election year. In terms of growth there is compensation: FDI may decrease but consumption will compensate.” 

Permit delays

Part of the hesitation from investors has more to do with structural issues than the election cycle, according to Mr Brodjonegoro, who says: “I think the slowing down is more ‘wait and see’ and more what happens as a result of some of them feeling that the licensing process takes too long in terms of getting their permits. [It] takes longer than expected so they might delay their investment realisation.”

On this front, progress is being made. Indonesia has 34 provinces and about 500 municipalities and regencies, all of which are directly elected and all of which have, until now, been allowed to make their own rules for investors on issues ranging from permitting to property registration. “This makes investors quite confused,” says Indra Darmawan, director of standardisation of investment licensing at the Indonesia Investment Coordinating Board.

That is changing. The country has created a national one-stop-shop system for investors backed by a website that launched in July, and it is pushing to streamline regulation. Using the online single submission system, Mr Darmawan claims the country has cut business registration times from 47 days in 2016, to about three hours in 2018. He says: “The president actually wants it to be five minutes,” inspired by systems in Dubai and New Zealand.

A need for speed

President Joko Widodo has pushed for speed in launching the new system. There have been issues, however. “There was no transition period – that was pretty challenging,” says Mr Darmawan. “It means you sail while building the ship.”

In its first two months, 25,000 business licences were issued by the new system. However, administrators were also receiving an average of about 300 complaints a day from users about system bugs, the business process and the still-confusing web of policies. “We [got] into a jungle of rules and regulations, and we want to streamline it pretty fast,” says Mr Darmawan. However, these problems have roused the country's opposition parties. 

Politics remains the central challenge to better co-ordinating investment policy in Indonesia. Mr Darmawan says the standardisation process faced resistance from “quite a lot, if not the majority” of quarters within government. “When you feel you’ve lost power, you try to resist it. It's harder to take changes on board,” he says. “But we work with champions [within government]. Some of them move faster than others, so we identify them and we work together on how to influence the others.”

East Java and the city of Surabaya have been leading the way, he says, and have welcomed delegations from other parts of the country to share their practices.

Global challenges

Indonesia looks set for robust – if more moderate – growth than in the past. The World Bank projects a rise to 5.3% GDP growth for 2018 on the back of stronger domestic demand. Higher commodity prices gave the country a boost, but external pressures are looking formidable.

Rising interest rates at the US Federal Reserve and the wind-up of quantitative easing programmes are pulling investment away from emerging markets. Volatility in these countries has also hit Indonesia hard: the rupiah, the local currency, has depreciated 8% against the US dollar in 2018, making it one of the worst hit by investors exiting emerging markets perceived to be vulnerable.

The central bank moved to defend the currency at the end of September, with governor Perry Wariyo insisting the move was essential to contain the current account deficit. Foreign reserves, meanwhile, have dropped to $117bn, their lowest level since the beginning of 2017. In an effort to alleviate this, the government is keen to boost tourism by building 'integrated tourism destinations'.

“Our currency is now under pressure, so we are talking about a five-year plan to improve the deficit on our current account,” says Mr Brodjonegoro. “We need to target, for example, how to do export promotion, what kinds of products or commodities we will prioritise: that will be our plan for the next five years.”

Infrastructure delays

The government has also made the decision to delay some infrastructure projects in order to improve the current account deficit, especially on “some projects that may have relatively high import content. But I don’t think the delay of this project will impact the target of the planning itself,” says Mr Brodjonegoro.

The Widodo government has made infrastructure a priority. As an archipelago of 17,000 islands – many with mountainous terrain – good air and sea links are essential to boosting the country’s economy. Attracting private financing is seen as crucial to supplementing tight state budgets. “I don’t think the government budget alone can accelerate the needs of the connectivity in both air and sea transportation,” says Mr Brodjonegoro.

As of January 2018, however, Mr Widodo was still chasing an additional $150bn in external financing for Indonesia’s $327bn project pipeline in 2019. Only $15bn was committed directly from the government, with the majority coming from private investors, including China.

Boosting home industries

Import substitution is another plank of the government’s plan to shore up the economy and move industries up the value chain. Bringing more steel production in the country is one target. Mr Brodjonegoro expects will also feed into government plans to continue large-scale infrastructure investment.

“Whenever we have the capacity, we [already] have the priority of building infrastructure. Why don’t we try to start building our own capacity in making the components and the factories themselves?” he says. “We need to increase the capacity of our own domestic steel manufacturers.”

There appears to be ample opportunity in this field. Steel consumption in 2016 was 12.7 million tonnes and, on the back of the government’s infrastructure investment plans, is projected to be 21.4 million tonnes in 2025, according to the OECD. While palm oil and crude oil remain the country’s biggest exports, it is also a major metals producer – however, the country remains the world’s third largest steel importer.

Steel is a touchy topic worldwide, however, with US anti-dumping duties on South Korean imports provoking outrage while China has pushed back at similar measures by the EU and Japan through the World Trade Organization.

While China is a major partner in Indonesian infrastructure projects, it is simultaneously hitting out at Indonesian steel exports. China’s commerce ministry announced an investigation into Indonesian exports of the metal which, together with exports from the EU and South Korea, Chinese producers claim are driving down prices.

And while global trade tensions between China and the US could potentially open some opportunities to Indonesia, such as supplying more steel to the US market, there are risks. “Let’s say that China sees a slowdown in growth, then it will have a negative impact on us as one of our main export destinations is China,” says Mr Brodjonegoro.