The Government’s increasing drive to improve Indonesia’s Investment Climate

Admin   |    11 November 2018

The government’s philosophy is that there is a high correlation between Indonesia’s economic stability and its investment climate. - A stable economy leads to more capital inflows and more capital inflows lead to a more prosperous economy creating a ‘virtuous cycle’. The government's primary tool for controlling investment climate stability is via the State Budget, which is set every year to manage state finance. The State Expenditures Budget heavily impacts private sector investment intentions as they will often work alongside the government on larger infrastructure projects and other initiatives such as Industry 4.0. As such, the budget must be credible and in accordance with market conditions as it will set the tone for domestic private investment as well as foreign capital inflows.

Given the State Expenditure Budget’s impact on both foreign and domestic  investment, we believe it is an effective instrument for long term economic stability. As such, we have reviewed the 2019 budget as we believe investors looking to predict the direction of future capital flows in Indonesia must focus here. The 2019 Budget’s key focus is on improving competitiveness through human resource development, via financial services innovation (app and payment services) and better connectivity of the labour force through both mobilisation and physical barrier removal (better transport infrastructure).

 In addition to focusing on human resource mobility and infrastructure,  the budget is looking to improve the effectiveness of social investment protection programs, and  streamlining the bureaucratic process. The effectiveness of social protection programs should go some way to improving domestic investment appetite, but of crucial importance to international capital will be improving bureaucracy which has made investment challenging to say the least. The key improvement has been via a one-door licensing system that integrates business permits from various ministries, so that business owners and investors in Indonesia can easily carry out their business without dealing with too many institutions.

The use of the State Budget Expenditure program as a stability mechanism has clearly been growing in effectiveness. The Indonesian economy have received increased recognition of late from the world's top rating agencies. In May 2017, Standard & Poor's increased their rating and in December 2017, Fitch Ratings upgraded Indonesia's ranking to one level higher than investment grade. Moody's Investors Service also increased Indonesia's sovereign credit rating outlook from stable to positive. The success of structural reforms was also able to improve Indonesia's investment climate, which was reflected in the increase in Indonesia's ease of doing business rating from position 91 to 72. In addition, in the short term, economic growth in 2018-2019 is expected to be sustained by the prospect of improving the global economy and some positive domestic developments.

However, the improvements in the economy have not only come from targeted expenditure but also via a more effective tax and incentive system. The government's seriousness in maintaining the investment climate is shown by it’s action of providing tax incentives through various instruments such as incentives to support priority sectors via tax holidays, tax allowances, exemption from import duty and other subsidies. There are also regional tax incentives, including Special Economic Zones, Industrial Estates, and bonded stockpiles, as well as incentives to encourage exports. These taxation innovations were delivered by President Joko Widodo during a joint session of the DPR-DPD in the Nusantara Building at the 2019 State Budget Expenditure Draft.

Written By : Fajar Adi Nugroho