Advertising its strengths: Attracting investment at the heart of the government’s economic strategy

The Indonesian government is in the midst of pursuing an ambitious new growth strategy, emphasising investment over domestic consumption as a primary growth driver in the wake of depressed commodity prices, lagging household consumption and lower-than-anticipated government revenues.

The strategy has seen President Joko Widodo aggressively market new investment opportunities in Indonesia both regionally and further abroad, with a series of ongoing policy reforms, infrastructure investment and the establishment of new free trade zones stirring interest. Although global volatility and a depressed growth rate in China – one of Indonesia’s fastest-growing trade partners – will both pose a challenge to the ambitious investment realisation targets set for 2016, the government’s efforts will almost certainly pay long-term dividends by supporting export revenues, value-added production and broad economic growth.

Strategy Shift

In March 2016 Bambang Brodjnegoro, the then-minister of finance, told delegates at a conference hosted by the Australian National University that unlike China, which has increasingly sought to replace investment with domestic consumption as a primary economic growth driver, Indonesia will aim to boost investment in high-priority sectors. According to Brodjonegoro, infrastructure spending rose by more than 100% after the government moved to cut costly fuel subsidies in late 2014 and early 2015, although falling export revenues and depressed commodities prices have offset these gains.

Nonetheless, the minister stressed that the Widodo administration will increasingly look to public-private partnerships in a bid to boost investment and reduce budgetary pressure. This is in addition to seeking new investment in the manufacturing and industrial segments, following an announcement from authorities in April 2016 that with oil prices at $35 per barrel and government tax collection revenues falling well short of targets, the state would have to cut Rp50.6trn ($3.7bn) from the 2016 budget.


With the forecast that tax and other government revenues will not be reached in 2016, the Indonesia Investment Coordinating Board (BKPM) has targeted new foreign direct investment (FDI) as a way of offsetting the anticipated losses. In January 2016 BKPM officials announced that they hope to see investment realisation increase by 15% to hit Rp594.8trn ($43.4bn) in 2016, supported by waves of reforms and public infrastructure investment, as well as the establishment of new free trade zones. Total investment realisation rose to Rp545.4trn ($39.8bn) in 2015, a 17.8% year-on-year (y-o-y) increase, representing 105% of BKPM’s annual target. Franky Sibarani, then-head of BKPM, told media in January 2016 that the government is particularly keen on boosting investment in manufacturing, infrastructure, services and trade, and raw resource processing, with the ambition of reducing dependency on commodities exports, bolstering export revenues and creating jobs in labour-intensive industries.

For 2016, BKPM is targeting an increase in realised manufacturing investment of 17.2% y-o-y to a value of Rp313trn ($22.8bn), and 10.4% growth in infrastructure, services and trade investment to Rp183.7trn ($13.4bn). Over the same year the board expects investment in raw resources to increase by an estimated 12% to Rp97.6trn ($7.1bn).

Indonesian Advantage 

Indonesia has much to offer potential investors. With a population of over 250m, it is the world’s fourth-most-populated country and the largest economy in ASEAN. The country’s burgeoning middle class, which numbered some 74m in 2013, according to the Boston Consulting Group, is expected to hit 141m by 2020 and has become a primary driver of growth by boosting domestic consumption, which accounted for an estimated 57% of GDP in the first quarter of 2016, according to Statistics Indonesia (BPS). Indonesia’s economy is the 16th-largest globally, with a GDP of $858.95bn at current prices in 2014, as per IMF data, while 60% of its young population is of working age, creating a vast labour base spanning over 17,000 islands, further incentivising investment in labour-intensive industries. The country is also set to play a much larger role in global trade, with plans to join both the Trans-Pacific Partnership (TPP), a US-led free trade agreement comprising 12 Pacific Rim economies (see analysis), the Indonesia-EU Comprehensive Economic Partnership Agreement and the Chinese-led Regional Comprehensive Economic Partnership, which also includes India (see overview).

Pro-Investment Reforms

In a bid to support rising investment and improve the ease of doing business in the country, the government has rolled out a host of reforms aimed at reducing transport costs, improving connectivity, eliminating red tape and non-tariff barriers, speeding up the licensing and approvals process, and providing new incentives to investors, both for private projects and public-private partnerships. The government also launched a dozen new stimulus packages between September 2015 and April 2016 (see Economy chapter), many of which included measures to improve the ease of doing business and strengthen investor sentiment.

These reforms will be critical for successful delivery of the country’s ambitious infrastructure development programme, running from 2015 to 2019, which envisions construction of 2650 km of highway, including 1000 km of toll roads; 46,770 km of road maintenance; the construction and refurbishment of 15 airports and 24 ports; a 3258-km rail line connecting Java, Sumatera, Sulawesi and Kalimantan; the development of bus rapid transit systems across 29 cities; and urban mass rapid transit development in six metropolitan areas and 17 urban centres.

New space for high-priority industrial projects will also be made available, with the government planning to build 15 new industrial parks on Sumatera, Kalimantan, Sulawesi, Maluku, Papua and Java by 2019, adding to a portfolio of four free trade zones already constructed on Sabang, Batam, Bintan and Karimun.

One-Stop Shop 

Even before rolling out these new policies, the government’s development agenda had called for improving trade liberalisation and pro-investment reforms, starting with the launch of a one-stop service centre (PTSP) at the BKPM in January 2015, combining the functions of 22 ministries and government institutions to reduce the time and money required for consultation and to obtain the necessary permits. The PTSP also helps process licences for sectors including manufacturing, power, tourism, and oil and gas. Using the PTSP, potential investors can acquire eight permits and a land-booking letter in just one three-hour visit. A direct construction service also allows investors to begin construction on a project prior to obtaining all of the necessary permits – no minimum investment is required – with the facility offered at 14 industrial parks spanning Sumatra, Java and Sulawesi. In addition, companies operating across the country’s eight special economic zones (SEZs) benefit from a host of incentives and facilities, with an additional three SEZs expected to open for business before 2019.

During his visit to Australia, Brodjonegoro stressed that the government plans to reduce commercial lending rates to single digits – from current levels of around 11% – with the central bank, Bank Indonesia (BI), already moving to cut rates twice, in January and March 2016, to 6.75%. BI also announced plans to introduce a new seven-day reverse repo rate of 5.5% .

PR Blitz 

As part of his bid to bolster trade relations with regional partners, Widodo will visit South Korea in 2016, building on a robust trade relationship, which has seen South Korea rise to become the fourth-largest investor in the country after Singapore, Japan, and the US, with more than $8bn in FDI realisation between 2010 and 2016. Indonesia is also moving to bolster trade ties with China, which became one of the country’s top-10 investors in late 2014, though BKPM estimates its actual FDI inflows to the country could be much higher than figures suggest, since many funds come from Chinese companies located in Singapore and Hong Kong. According to the Financial Times, Chinese investment has increased, reaching $23.2bn between 2010 and 2015, and representing 11% of total outbound Chinese investment, the majority of which was concentrated in minerals processing, energy and transport projects.

Steady Progress 

The results of these early liberalisation efforts seem to be paying off, with FDI realisation up 12.3% y-o-y in the first half of 2016, amounting to Rp195.5trn ($14.3bn) and led to the creation of 459,000 new jobs.

Together, FDI and direct domestic investment grew by 14.8% y-o-y in the first half of 2016, according to recent BKPM figures, for a total of Rp298.1trn ($21.8bn) and the creation of some 682,000 new jobs.