Indonesia policy package met with skepticism

Indonesia policy package met with skepticism
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Indonesian President Joko Widodo has rolled out the first of three policy packages aimed at deregulating the economy. The policies have been met with skepticism, however, as Widodo’s administration has thus far proven unable to deliver on promised changes. 

In a short address to the public, Indonesian president Joko Widodo announced the first of three deregulation packages on September 9th. In coordination with the central bank and the Financial Services Authority (OJK), the stimulus package will be implemented by the end of October, with the aim to create a more conducive macroeconomic environment.

The move to deregulate the economy comes as Jokowi wrestles with a faltering economy, a plunging currency and a sense among foreign investors that his reform agenda, which helped sweep him into office last year, is unfolding far more slowly than hoped.

Lacklustre economy, plunging Rupiah

In the second quarter, Indonesia’s annual economic growth dropped to 4.67 percent, its slowest pace since 2009. Weak prices for commodity exports and slacking demand in China, the largest buyer of Indonesia’s commodities, make an acceleration of Indonesia’s lacklustre economic growth appear fanciful at best.

Indonesia’s central bank expects that China’s slowdown will dampen the Southeast Asian nation’s expansion. Each one-percentage point decrease in China’s growth is estimated to equal a 0.4-to-0.6-percentage point decline for Indonesia’s.

Concerns over China’s economic slowdown have also put heavy pressure on the Rupiah. Disappointing Chinese data and the prospect of higher US interest rates have taken the Rupiah to 14,322 a Dollar—its lowest level since the Asian crisis in 1998. The currency depreciation makes refinancing more difficult for Indonesia’s corporate sector, and builds up risks for companies with unhedged foreign currency exposure.

Enhancing Indonesia’s business climate

The announced set of measures to lure investment is the first of three deregulation packages. It encompasses three broad policy objectives intended to address the country’s economic struggles: boosting the competitiveness of Indonesia’s manufacturing industry, accelerating national strategic projects and fostering investment in Indonesia’s property sector.

Jokowi failed to provide specifics, but some further details of the package were outlined in a document posted on the website of the Coordinating Ministry for Economic Affairs on September 10th. The government has set its sights on boosting manufacturing in order to reduce dependence on sluggish commodity exports.

The administration also intends to simplify the process for obtaining business permits, streamline bureaucracy, ensure law enforcement, and improve business certainty. A total of 89 regulations considered detrimental to Indonesia’s business climate will be revised at this stage.

Some of the regulations investors were hoping would be loosened—such as rigid labour restrictions, import tariffs, and a ban on the export of some unprocessed commodities, such as bauxite and nickel—were not included in the president’s announcement. For a comprehensive overview of the package and its provisions investors will however have to wait until October.

No immediate impact

The policy package has been met with skepticism. Analysts and economists say its impact will only be felt in the medium to long term, and the government will have to show that it can actually deliver the proposed changes.

It is fair to say that Jokowi’s administration has struggled at the implementation level, making it essential for the president to restore confidence in his ability to get things done. On the bright side, the envisioned deregulation merely requires getting rid of rules rather than having to implement them, making it an attractive policy tool.

Hopes that the announcement would invite positive knee-jerk reactions in the markets were disappointed with the benchmark Jakarta Composite Index (JCI) remaining flat and the Rupiah continuing its fall.

More to come

Although the unveiling of the measures did little to mollify wary investors, the supply-side move certainly yields business opportunities. It shows that Jokowi’s administration is committed to remove obstacles to investing in Indonesia and determined to enhance the country’s business climate.

The country ranked 114th out of 189 in the World Bank’s 2015 Ease of Doing Business survey, almost 100 places behind Malaysia and more than 30 below Vietnam. In order to compete with its Southeast Asian neighbours for foreign capital, Indonesia is forced to create further incentives for investors.

The second installment of the deregulation package is expected to be announced by the end of the month, and could include revisions to the so-called negative investment list. The negative investment list stipulates which sectors within the Indonesian economy are open to foreign investment, and is hence of vital concern to investors.

Categories: Asia Pacific, Economics

About Author

Alexander Scherpf

Alexander focuses on political risk in Southeast Asia. Prior to joining Global Risk Insights as a contributing analyst, he worked with the Economic and Trade Section of the EU Delegation to Indonesia, Brunei, Darussalam and ASEAN. He holds a MSc degree from UCL’s School of Public Policy.