Indonesia: Big Bang Reforms Or Small Pop?

Indonesia’s move to open the doors wider to foreign investment could help spark growth in Southeast Asia’s largest economy. But with significant restrictions remaining in place for a range of sectors, the effect may be more of a pop rather than a “big bang,” analysts say.

Announcing the changes Thursday as part of the Jokowi administration’s 10th economic stimulus package, Economic Minister Darmin Nasution said the package would boost both domestic and foreign direct investment (FDI), while protecting small and medium-sized enterprises (SMEs).

Under the policy, 35 industrial sectors including cold storage, film processing labs, sports centers, toll road operators, tourism and warehousing will be removed from the “negative investment list,” although 20 new sectors were added.

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“It means that 100 percent foreign ownership is allowed in the 35 sectors that have fully opened up to FDI,” Darmin said at the State Palace in Jakarta.

E-commerce investments with a market value above 100 billion Indonesian rupiahs ($7.4 million) were also removed from restrictions, a measure that should be welcomed by the nation’s growing technology sector.

In addition, plantation firms with more than 25 hectares [62 acres] of land integrated with a processing plant will be allowed foreign ownership of up to 95 percent, while seven types of businesses, including leasing companies, will be permitted 85 percent overseas equity, according to the Jakarta Post.

“We are opening up and rationalizing our investment regime,” Trade Minister Tom Lembong told Bloomberg News. “It’s a big push. We had fallen behind from where we should be.”

According to Lembong, increased foreign investment and higher government spending on infrastructure will help offset sluggish exports, boosting economic growth to as fast as 5.2 percent this year.

Indonesia posted gross domestic product (GDP) growth of 4.79 percent in 2015, its slowest rate of expansion since 2009, although the economy posted a 5.04 percent gain in the last three months of the year, helped by a 7 percent quarterly rise in FDI. For 2015, FDI increased 19 percent to reach around 366 trillion rupiah ($27 billion), with the main island of Java receiving nearly half.

The reforms were welcomed by financial markets, with the benchmark Jakarta Composite Index rising by nearly 1 percent compared to declines across the region, while the rupiah strengthened against the dollar.

“It’s definitely a step-up compared to the policy packages you saw before — these were relatively small-scale,” Nomura analyst Euben Paracuelles told the Financial Times.

“From the signaling standpoint I think this could cement what has been changing slowly from protectionist sentiment to a little more market friendly [sentiment].”

The financial daily said the Indonesian trade minister had led a “marked pivot in economic policy” since his appointment in August, including moves to join the Trans-Pacific Partnership (TPP).

Restrictions Remain

However, despite claims of the largest opening up to foreign investors in 10 years, a range of restrictions remain in place.

Various businesses are still allowed only up to 67 percent foreign ownership, including golf course developers, health care, private museums and consulting and construction businesses with contract values above 10 billion rupiah, while seven sectors are permitted a maximum 51 percent overseas ownership, including natural tourism management.

Meanwhile, 32 sectors were still pegged with 49 percent maximum foreign ownership such as acupuncture and land transportation.

The government’s new negative investment list, which was last revised in 2014, includes sectors “reserved for SMEs” including architectural services and businesses with an investment value of below 10 billion rupiah.

Foreign investors have also raised concerns over intellectual property protection, with Swedish furniture giant Ikea having recently lost a legal battle against a small Indonesian business claiming its trademark.

In Transparency International’s latest report, “Corruption Perceptions Index 2015,” Indonesia ranked 88th in perceived levels of public-sector corruption among 168 countries surveyed, below neighboring Malaysia (ranked 54th) although ahead of the Philippines (95th). By comparison, Singapore placed eighth, Australia was 13th, while Hong Kong and Japan tied on 18th.

ANZ economist Glenn Maguire described the FDI reforms as a partial “winding back” of Indonesia’s ultra-protectionist move in 2007 in which it shut the door on foreign investment to 338 sectors.

“Our initial impression is that this is not entirely broad-based and has fallen short of the ‘big bang’ moniker…of the 49 sectors for which ‘changes’ have been announced, 19 are actually increased restrictions and 30 are more open,” he said in a research note.

Maguire said the decision to allow 100 percent foreign ownership of cold storage and distribution along with warehousing would help “prevent volatility in food prices” due to food perishing during transport. He also noted the president’s decision to allow the China-led Asian Infrastructure Investment Bank to finance a maximum of 30 percent of Indonesia’s infrastructure needs, a measure implying more investment will be needed from other sources.

The economist also pointed to the potential for further monetary easing, including another interest rate cut this month, to spur growth. With the inflation rate at around 4 percent, forecast to reach 5 percent this year, and the official rate at 7.25 percent, Jokowi’s suggestion that the official rate should fall closer to the inflation rate implies further cuts.

“It is somewhat ironic that the 10th stimulus package has been coined the ‘Big Bang’ package. If all the stimulus measures had been announced simultaneously, there would certainly have been a ‘Huge Bang’ announcement effect,” Maguire said.

“Rather, the slow drip-feed of each fiscal stimulus, regulatory and foreign investment reform has had the decibel level of a small pop. This continues to place the burden of macroeconomic stimulus on the central bank and further monetary policy easing in the near term is to be expected.”

In its recent report, the World Bank predicted Indonesia would pick up speed this year, with GDP growth rising from an estimated 4.7 percent in 2015 to 5.3 percent this year and 5.5 percent in 2017, “provided reforms are implemented to encourage investment and boost productivity.”

For an economy that ANZ called “ASEAN’s most challenged” due to its exposure to China’s commodity slowdown, the latest measures should go some way toward reassuring investors of Jokowi’s reform credentials, even if far from the promised big bang.

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