Indonesia seeks to tackle economic reforms

Indonesia seeks to tackle economic reforms

Indonesian President Joko Widodo has sought to fulfill campaign promises to develop the Indonesian economy and tackle the deficit. To this end, Widodo has bolstered domestic industries with subsidies and tariffs. While Widodo’s reforms should generate substantial confidence for domestic businesses in the pharmaceutical, tourism, commodities, and tech sectors, the efficacy of these measures remains uncertain.

Indonesia seeks increased foreign investment

Indonesia’s current leader, Joko Widodo, is seeking to jump-start the economy with a proactive reform package and FDI drive. Recently, Indonesia and Vietnam pledged to double bilateral trade to $10 billion by 2018, as well as cooperate on the delineation of exclusive economic zones (EEZs).

Furthermore, Widodo has expressed his support for the Chinese-led Asian Infrastructure Investment Bank (AIIB), calling for greater Chinese investment in the country. Consequently, recent negotiations with China have yielded aerospace and high-speed rail deals, as well as an agreement on taxation. Widodo also stated that he hopes for a currency swap deal with China and that bilateral trade will top $150 billion by 2020.

Indonesia also recently announced that its was adding 30 countries to its visa-free travel list. Previously only 15 – mainly Southeast Asian – nations had enjoyed visa-free travel to Indonesia. This visa reform is expected to attract one million additional tourists, generating $1 billion for the Indonesian economy.

Interestingly, Australia has been left out of the new visa-free travel list. Despite being the third largest (12%) source country for tourists to Indonesia, Australians will still need visas to visit. This is an obvious snub to Canberra, as relations with Australia are at historical lows due to the fallout from the Bali Nine drug smuggling ring.

Jakarta announces slew of audacious domestic reforms

While Indonesia is seeking greater foreign investment, Widodo’s reform package is at its most audacious in the domestic sphere. Widodo is seeking to reduce the deficit by implementing an import-substitution-industrialization (ISI) program alongside his social reforms.

Indonesia’s recent implementation of universal health insurance has boosted confidence in the domestic pharmaceutical industry, which expects a 12% rise in annual profits to $6 billion, surpassing industry growth rates of 7.6% for 2014.

Currently, Indonesia imports more than 90% of the raw materials required for pharma production from China and India. Consequently, the Indonesian government is expected to provide support (industry experts argue $1.08 billion is needed) for basic chemical production. The government is also simplifying permits for both domestic and foreign pharma companies, to boost local production.

Indonesia is a major player in the commodities market, and has recently implemented export levies on palm oil ($50 per metric ton for crude, $30 per metric ton on refined palm oil). Moreover, the government will be implementing additional taxes with rates ranging from 7.5 – 22.5% when palm oil prices are over $750 per metric ton.

These levies are expected to raise $885 million and will primarily fund the government’s bio-diesel program, subsidizing 2.5 million tons at 4000 rupiah ($0.30) per litre.

The government has stated that these levies are designed to help reduce oil imports, aid local agriculture, as well as fund replanting and research. To demonstrate its commitment to bio-diesel, Jakarta already raised the bio-fuel subsidy from 1500 rupiah to 4000 rupiah in February; and staring in April, the mandatory blended bio-diesel content limit was raised from 10% to 15%.

The government has also stated that it is considering implementing similar export levies in the rubber and coffee industries, with commodity prices rising sharply on this news.

A smart(phone) move?

Perhaps the most interesting element of Widodo’s economic reform package is Jakarta’s intention to create a domestic smart phone industry. In an effort to reduce the country’s trade imbalance, Indonesia has implemented minimum local content levels for imported smart phones, imports which cost Jakarta $3 billion a year.

Currently, most Indonesian smart phone imports come from China, yet the new 30% local content rules have seen an increase in domestic manufacturing. Specifically, importers must manufacture in Indonesia or have their import licenses revoked by 2016/2017.

This move has drawn criticism from the U.S, which argues that such quotas breach international trade law and punish American smart phone companies such as Apple. Indeed, Apple and Co. have sought to break into Indonesia, one of the last large markets without significant smart phone penetration.

Another concern for American companies is that the new local content rules also mandate 20% local content in research and development for phones sold in Indonesia. Companies would have to have a design and development centre in the country to comply with the new laws, according to Industry Minister Saleh Husin.

Interestingly, Minister of Communications Rudiantra has stated that “local content” could also potentially encompass design via intellectual property laws.

Until last year there was no smart phone manufacturing industry in Indonesia. Since then, 15 companies have submitted plans to the Industry Ministry for smart phone production – including Samsung, which has opened a factory outside Jakarta.

Indonesian local content rules themselves are not new, but the concentrated focus on boosting domestic industry is. Polytron, the first Indonesian company to produce 4G phones, relocated from China in 2012 to comply with local content rules. This initially caused concern for Polytron as manufacturing costs where up to 50% higher in Indonesia than China.

However, Jakarta has sought to support Polytron and similar companies by tailoring legislation to their favour. Despite being a smaller player in the smart phone market, Polytron already has 35% local content in their devices, putting them at an advantage over larger foreign players. The Indonesian government has also informed Polytron that if the IMPO reaches 40% local content, Jakarta could up the minimum requirement to 40%; further benefiting Polytron.

Jakarta’s ambitious program to cut the current account and trade deficits has boosted confidence in many domestic industries, while eliciting complaints from American smart phone companies and the Australian tourism industry. It remains unclear if these reforms have poised Indonesia for economic development, or if Jakarta has just jeopardized its chances, losing competitiveness to other emerging markets in the region.

Categories: Asia Pacific, Politics

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Jeremy Luedi

Jeremy is a widely referenced political risk expert and weekly columnist for Global Risk Insights (GRI). Jeremy's writing has been featured in Business Insider, Huffington Post, Nasdaq.com, The Japan Times, MSN Money, and Yahoo Finance. His work also has been quoted and recommended by Time Magazine, Politico, Transparency International, and Greenpeace, among others.