Indonesian government enacts progressive pro-business reforms

These have been especially pronounced in 2016, with commodity prices remaining low, and reduced demand from China maintaining the trend for the foreseeable future. Indonesia’s economy has been long reliant on natural resource exports, such as coal palm oil and rubber. As a result, growth for the first half of the year has hovered just under 5%. Although Q1 growth for this year is higher than that of 2015, buoyed by increased government investment, it is not enough to meet the job creation needs of the country’s growing population.

To face these issues, President Joko Widodo (Jokowi) has applied the same hands-on approach that made him successful as a self-made businessman and then mayor of Surakarta and Governor of Jakarta. During this time he became famous for pro-actively engaging the population and addressing issues such as flooding, education, infrastructure and corruption. 

Not someone to shy away from difficult problems, President Jokowi has tackled the country’s economic woes most notably through a hardware and software approach: building infrastructure and applying deregulation.

A dozen economic stimulus packages have been implemented over the last year to this end. These have mainly been focused on reducing and removing bureaucratic red tape, increasing tax incentives for commerce and a number of other initiatives improving the overall ease of doing business.

Infrastructure

However, public spending on infrastructure has been the shot in the arm that is boosting growth. Altogether, approximately $22 billion has been allocated to infrastructure development. This amount represents the largest infrastructure budget allocation in history of the country. A small portion of the $22 billion has been allocated to irrigation development but the lion’s share is focused on transport linkages including roads, railways, airports and maritime ports. As an archipelago nation of over 17,000 islands, the latter is particularly important for overall connectivity.

“As one example (of the economic stimulus packages) we were able to cut the dwelling time in Tanjung Priok (Indonesia’s largest port in Jakarta) from seven days to three days. This is important, because it reduces the cost of logistics. Of course the effect is more medium term rather than immediate, as it is impossible to change these things over night.  We need to be patient and persistent, but I would say that investors are already seeing significant benefits,” explains Dr. Rizal Ramli, Indonesia’s Coordinating Minister of Maritime Affairs who is also a trained economist.

The 13th economic stimulus measure, pending final approval, is The One Million Houses Program. This five-year initiative is aimed at providing housing to the country’s low-income segment. Government agencies, as well as the state budget will provide the necessary funds for this ambitious project. 

Deregulation

Over the long term, Indonesia’s moves towards deregulation are perhaps of greater interest to the domestic and foreign business community. Suharto’s 30-year reign saw a culture of corruption, collusion and nepotism (KKN) become ingrained in government agencies. Subsequent presidents have worked to reduce this corporate culture, but none with as much vigor as Jokowi.

In fact the President’s Chief of Staff, Teten Masduki, spent his career as an activist heading various human rights and anti-corruption organizations. His knowledge of the debilitating effect of graft and state mismanagement, which saw billions plundered from the republic as well as grave injustice perpetrated, has clearly influenced presidential priorities.

Beyond being a moral and rule of law issue, the economic implications of this reform are far-reaching, as Mr Masduki explains, “The deregulation program, the second of our priorities, is very important. It is to make sure that our bureaucracy is efficient and more transparent. We want Indonesia to be attractive for investors. So we fight corruption and take out more procedural bureaucracies.”

SMEs

The effect this plethora of reforms will have on small and medium enterprise (SME) growth, as well as big business is significant. Less red tape and opportunity for corruption as well as reduced taxation on a range of sectors has seen the potential for bribe elicitation from government agencies diminish. Furthermore, the implementation of soft loans for SMEs, and reduced energy tariffs for labor-intensive industries (a typical characteristic of Indonesian SMEs) has boosted the competitiveness of the sector. Protection measures for SMEs have also been implemented. 

Street vendors, the ubiquitous Indonesian SME have also benefited from reforms. Free leasehold certificates have been issued in 34 zones in an effort to boost economic activity. Considering President Jokowi himself was a self-starter businessman before entering politics, such an SME focus is hardly surprising.

Foreign investment & trade

Of course, despite being the world’s fourth most populous nation, Indonesia cannot function without extensive foreign investment and trade. Traditionally nationalist elements in politics have limited foreign ownership and excluded areas of the economy from foreign investment. This has also been amended by the Jokowi Administration, which has revised the negative investments list – expanding the sectors available to foreign business interests.

Facilitating foreign trade has also been a focus for the government, which plans to complete negotiations on the Indonesia-European Union Comprehensive Economic Partnership
Agreement (IE-CEPA) by 2019, and announced its intention to join the Trans-Pacific Partnership.

“With the cabinet reshuffle in 2015, there was again some cautious optimism and we got the news that there were going to be reforms and economic policy packages, which were well received by the business community. The message from the Jokowi team was very positive and from a trade perspective, perhaps the most important announcement was that Indonesia would consider joining TPP. We think both that announcement and the reform packages have really set the right tone from the top and it seems Indonesia really recognizes that foreign investment can be good for the country,” says Brian Arnold, President of the American Chamber of Commerce in Indonesia.

The economic stimulus packages have also opened the world’s most populous Muslim country to Islamic finance opportunities. The importance of sukuk loans as a means of financing SMEs cannot be understated. Islamic microfinance has played a huge role in boosting fledgling businesses in economies analogous to Indonesia. It is hoped that this will soon become a widely adopted and effective boost to grass roots commerce across the archipelago.