Indonesia's New Government: Reasons To Be Cheerful

250 million people. 17,000 islands. One new President. What does the new Indonesian Government mean for businesses? 

By Lizzy Hawkins, Director of Trade & Investment, UKTI

 

On 22 July 2014, Joko Widodo - former furniture salesman, former Mayor of Solo, and then Governor of Jakarta, was announced as the winner of Indonesia's Presidential election. On 20 October he was inaugurated. The election was closely contested by Jokowi and his opponent former Lt Gen Prabowo Subianto. Prabowo's coalition controls both of Indonesia's legislative bodies: the DPR (parliament) and MPR (senate). This opposition coalition has already demonstrated its willingness to challenge the new Government by voting through several controversial measures in the face of strong opposition by the incoming Government.

 

So what does this mean for the business environment in Indonesia?

 

President Jokowi was elected on a reformist agenda which offers optimism to business. Most relevant, and potentially transformative, are his plans to reduce or eliminate Indonesia's fuel subsidy. The subsidy cost the Government approximately $23bn in 2013, or around a third of the national budget. It would be a truly spectacular achievement if Jokowi’s government delivers its promise to redirect this money to invest in the President's priorities of infrastructure, healthcare, education and agriculture. So far the story is a positive one: the President delivered the first promised subsidy reduction last week, less than a month after his inauguration, and resisted protests which were in any case smaller than expected. The big test will be how far is Jokowi able to reduce the subsidy, especially when Parliamentary support becomes necessary.

 

Another important priority for the business environment is delivering infrastructure improvements, with a particular focus on maritime infrastructure. Infrastructure costs in Indonesia are, on average, 30% higher than in the rest of the region. Power blackouts, gridlock, an overloaded mobile phone network and long port waiting times all hamper economic growth and make doing business more expensive. Jokowi used his recent run of international summits (the APEC and ASEAN Summits and the G20) to tout for international investment in Indonesia to develop infrastructure. Jokowi's positive record on implementing infrastructure developments in the cities he has governed makes this a promising area for development, however the ongoing structural challenges of land ownership and investment capability should not be underestimated.

 

The President has also put improving the ease of doing business and increasing transparency in Indonesia high on his government's agenda. Indonesia currently ranks 114th out of 180 on the World Bank's Ease of Doing Business Index and 114th out of 177 on Transparency International's Corruption Perceptions Survey. Complaints about unclear regulations, opaque decision making and complex bureaucracy come high on the list of concerns of foreign and local businesses in Indonesia. The question will be how far can the Government’s good intentions percolate through Indonesia's highly devolved government system? Jokowi took a strong stand on transparency and ease of doing business during his time as governor in Jakarta and Solo. Indeed, the British Embassy funded three projects to help improve the Jakarta government business environment: one to train Jakarta government officials in anti-corruption practices, one to implement a highly successful e-procurement system and one to implement a 'one-stop-shop' for business licensing. With so much spending devolved to local Government on a huge range of subjects, including education, healthcare, and a lot of infrastructure, action on transparency needs to be taken on the local level, not just centrally.

 

Are you local?

 

While I sound a note of cautious optimism for the general business environment under the new government, it seems clear that the government's ambitions to develop Indonesia's industrial base will continue to mean restrictions on foreign investment, workers and content. Indonesia's Laws on Industry and Trade passed in late 2013 and early 2014, codify those ministers' powers to restrict imports in certain sectors, to mandate national standards and require certain thresholds of local content. The idea is that foreign companies will be incentivised to set up local manufacturing to take advantage of the benefits conferred by local content and local manufacturing. In many cases, however, Indonesia lacks sufficiently skilled workers and effective infrastructure to make that worthwhile, even in a market as large as it is. The government will continue in its desire to develop Indonesia’s industry; it remains to be seen whether this will continue to be achieved by requiring whole supply chains to relocate or whether it will instead develop specialisms to participate in the global supply chain.

 

In conclusion

 

Doing business in Indonesia is not easy, even when you're the President. Indonesia is a massive, diverse and sprawling country where political power and money is highly devolved to more than 600 different districts with the widest possible capabilities, characters and priorities. The new government will have to work hard to get its own parties, parliament and local governments to engage with and support its agenda. The new government will also struggle with less favourable economic headwinds. Commodity prices, on which Indonesia still depends, look set to remain low; the current account deficit looks here to stay unless Indonesia can start generating more fuel domestically or boost exports dramatically. The end of quantitative easing means foreign investment growth in Indonesia is falling and the advent of the ASEAN Economic Community risks the loss of Indonesia's top talent to better-paid jobs elsewhere in the region.

 

Whatever happens, Indonesia is on the up. It will still grow at 5% even if the Government doesn't implement a single reform -  not a bad position to be in. Indonesia's highly-connected consumers will continue to get savvier, more demanding and richer. In industrial sectors, it will need more advanced technology and more of it. The Indonesian government has a history of making better decisions in worse times; there is a chance that they will make moves to create a more inviting environment for foreign investors if foreign investment continues to decline.

 

The new government has the right intentions and the population and financial markets – regardless for whom they voted for – want change. How far this change can be delivered, and Indonesia's real growth potential can be harnessed, will be fascinating to watch over the next few years. 

 

If you would like to find out more about what opportunities might be on offer in Indonesia for your company, UK Trade & Investment provides advice, information and introductions to British businesses to help them win business around the world. We also work very closely with the British Chambers of Commerce in Indonesia to deliver support to business and we would be delighted to speak to you about doing business in Indonesia. 

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