Bilateral trade deals seek increased investment in Indonesia


Consistent, robust economic growth, a 260m-strong population and a favourable position as South-east Asia’s largest economy have driven Indonesia to become an increasingly important actor in global trade. The country’s trade with the US and China has recorded double-digit growth in recent years, and it stands as the largest destination for intra-ASEAN investment, with middle-class expansion and a steady rise in domestic consumption expected to keep it at the forefront of the ASEAN trade agenda in the years to come.

COMPLEX ENVIRONMENT: Despite generally positive prospects, 2017 was geopolitically volatile, and the country now finds itself navigating an increasingly complex and uncertain external trade environment. The dual surprises of US President Donald Trump’s 2016 election victory and the UK’s June 2016 decision to exit the EU both present the country with considerable challenges as well as new opportunities. Although Indonesia had signalled its intention to join the Trans-Pacific Partnership (TPP), the world’s largest free trade agreement, President Trump’s decision to withdraw from the pact has changed its scope significantly. Stakeholders are now looking to new bilateral agreements with Australia and the EU, as well as Chinese-led trade pacts including the Regional Comprehensive Economic Partnership and the Free Trade Area of the Asia Pacific.

Although export revenues contracted for the fourth consecutive year in 2016, improved commodity prices could support a reversal in the near future. However, a spate of protectionist policies unveiled by the administration of President Joko Widodo has cast a shadow over near-term export growth, even as global commodity prices continue rising. Reconciling the impetus for protectionist policies aimed at boosting industrialisation with the need for near-term revenue growth stands as a significant challenge for the government. At the same time, the country’s ongoing infrastructure development agenda, continued economic reforms and new efforts to improve the business climate should see increased foreign direct investment (FDI) in 2018, especially in value-added processing and manufacturing activities.

AT A GLANCE: The Indonesia Investment Coordinating Board (BKPM) is the primary ministry responsible for investment promotion and facilitation in the country, with a mandate to seek quality investments that reduce social inequality and unemployment. Reporting directly to the president, BKPM acts as the government intermediary for foreign companies seeking to establish operations in Indonesia, operating under a strategic development plan emphasising near-term revenue growth through raw commodity exports – Indonesia was the world’s largest producer of palm oil, fifth-largest producer of coal and sixth-largest producer of nickel in 2016. Mid-term priorities include investment in hard infrastructure to reduce transportation costs and improve the business climate, advanced industrialisation, development of a highly skilled workforce and reduced regulatory uncertainty, with the long-term goal of transforming into a knowledge-based economy.

TRADE & INDUSTRY: Through nine directorates and agencies, the Ministry of Trade (MoT) is tasked with managing trade and trade policy, while the Ministry of Industry (MoI) is responsible for supporting industrial growth through policy implementation, providing technical guidance, industrial research and development, as well as managing state assets in the sector. The MoI encompasses 12 different agencies and directorates, including the directorate generals of agriculture, chemicals and textiles, metal, machinery, transportation and electronics, as well as small and medium industries, industrial region development and local product usage enhancement. MoT units include the directorate generals of domestic trade, foreign trade, international trade cooperation, and consumer protection and trade compliance, as well as the National Agency for Export Development. Thomas Lembong, a Harvard-educated investment banker, served as Minister of Trade from August 2015 to July 2016, and is now the chairman of BKPM. Enggartiasto Lukita and Airlangga Hartarto were appointed as minister of trade and minister of industry, respectively, in July 2016.

DOING BUSINESS IMPROVEMENTS: In terms of specific policies to reduce regulatory uncertainty, the Medium-Term Development Plan (MTDP), spanning 2015-19, targets improving the business licensing process, investment realisation and the country’s investment climate. BKPM has already made moves to expedite and simplify the process of establishing a business in the country, and in January 2015 President Widodo officially launched a new one-stop service centre at the board, supported by 22 ministries and government agencies, and covering the licensing process for all business fields. An important component of the new service centre is an online system which can be used to monitor the process of a business licence application.

Moves to improve the investment climate will be particularly critical as the country works to improve its ranking in the World Bank’s “Doing Business” survey, an annual ranking of investment competitiveness encompassing 190 countries. President Widodo has targeted reaching 40th place on the index. The country jumped an impressive 19 places to 72nd in 2018, after rising 15 places in 2017, although a recent Constitutional Court ruling could see red tape continue to hamper the licensing process at the local level (see analysis).

RESTRICTIONS: Indonesia has historically been less open to foreign investment than many of its ASEAN neighbours and maintains a negative investment list (DNI) of sectors and industries in which foreign ownership is restricted or prohibited. Nevertheless, this list is subject to change; in an effort to encourage foreign investment, the DNI was amended in 2016.

Sectors that are completely closed to foreign investment include fishing for endangered species; shipwreck artefact collection; coral harvesting; chloral alkali processing using mercury; the manufacturing of certain pesticides and ozone-depleting substances; hard liquor, wine and malt beverage manufacturing; the organisation and operation of passenger terminals for land transport; weigh station operation; telecommunications and shipping navigation; air navigation; motor vehicle testing; and the management and operation of radio frequency spectrum and satellite orbit monitoring stations, public museums and casinos; and historical and archaeological remains. Business lines restricted to micro-, small and medium-sized enterprises (MSMEs) include staple crop cultivation, plantations of less than 25 ha, and cultivation of cash crops including coconut and palm oil, cotton fibre and seeds, cashews, cocoa, coffee beans, cane sugar, tea, tobacco, rubber, pigs and chickens. Non-staple crop plantations over 25 ha are open for investment, however.

In May 2014 the administration of then-President Susilo Bambang Yudhoyono made controversial revisions to the DNI that have been retained by the Widodo administration. Foreign investment in certain sectors was expanded – the foreign investment limit for venture capital companies was increased from 80% to 85%, and the manufacture of pharmaceuticals from 75% to 85% – under these revisions, and the government clarified that any sector not listed on the DNI was open to foreign investment. New restrictions were also put in place for the oil services, retail, small power plant, cold storage, warehousing, horticulture and e-commerce industries.

RAW EXPORT BAN: In January 2014 the previous administration also rolled out a ban on the export of certain unprocessed minerals, which slashed nickel, bauxite and iron ore production.

The move was intended to spur investment in local minerals and metals processing, and met with some measure of success: in August 2014 two Japanese steel giants, Mitsubishi Steel Manufacturing and Nippon Steel & Sumitomo Metal, announced plans to invest a combined $450m in the Indonesian steel industry, and in September 2014 South Korea’s Krakatau POSCO launched production of steel slabs and steel plates at its factory in Cilegon. The following month Russian firm Vi Holding announced plans to invest $500m to build an alumina plant in the country before 2018, citing the effect of the mineral export ban on global nickel prices as the reason for its decision. October 2014 also saw Chinese companies Fuhai Group and Ansteel Group announce up to $1.2bn of investment to build a new industrial estate on Sumatra, which will include a steel plant. Nonetheless, international media reported that the country risked losing $2bn of export revenues per month as a result of the ban. President Widodo re-affirmed the ban in November 2014, although the government surprised investors by rolling back raw mineral export restrictions in January 2017, a move which should support up to 15m tonnes of new nickel ore shipments in 2017. However, the government simultaneously announced a new ban on the export of copper concentrate, as well as new regulations for the vast Freeport-McMoRan copper mine in Papua, which included a mandate for the company to divest a 51% stake in the operation to the state. The subsequent legal battle has resulted in more than $1bn of lost revenues, protests and strikes, and is particularly ill-timed given the resurgence of copper prices (see Economy chapter).

TRADE BALANCE: The mineral export ban, falling global commodity prices and rupiah depreciation have affected Indonesia’s export revenues, which have been in decline since 2012, although a concurrent decline in its import bill has supported a significant improvement in the country’s trade balance.

The MoT reports that Indonesia’s export revenues fell by 3.4% in 2016 to $145.19bn, the fourth consecutive year of contraction, after the country recorded $190.02bn, $182.56bn, $175.98bn and $150.37bn of exports in 2012, 2013, 2014 and 2015, respectively. Oil and gas exports accounted for around 9%, or $13.1bn of export receipts in 2016, a sharp decline from the $36.98bn recorded in 2012 (see Energy chapter). The mid-2014 oil price crash, which saw global crude oil prices fall by more than 60% between June 2014 and January 2016, served to reduce Indonesia’s import bill. Import expenditure decreased from $191.69bn in 2012 to $186.63bn in 2013, $178.18bn in 2014, $142.69bn in 2015 and $135.65bn in 2016, an average annual decrease of 9.2%, with the value of oil and gas imports falling by 56% in 2016 to end the year at $18.74bn.

With the cost of energy imports dropping, the country was able to reach a $7.67bn trade surplus in 2015, its first surplus in three years, against a $2.2bn deficit in 2014. The trade surplus rose by 15% in 2016 to $8.83bn and reached $10.87bn between January and September 2017, a 69.5% increase over the same period in 2016. Promisingly, export revenue surged by 17.5% year-onyear (y-o-y) in the January and October 2017 period to hit $138.46bn, according to the most recent MoT figures, supported by rising commodity prices.

EXPORT BASE: Benefitting from enormous mineral and agricultural reserves, Indonesia’s export base is well diversified and expanding steadily.

While raw commodities such as palm oil and minerals remain the country’s export mainstays, manufacturing and processed minerals exports have risen considerably in the first eight months of 2017. According to MoT data, Indonesia’s top-seven exports are fats, oils and waxes – including palm oil but excluding biofuel made from refined palm oil – which accounted for 15% of total exports during the first eight months of 2017; mineral fuels and oil, comprising 13% of total revenues; electrical equipment with 5%; rubber and rubber articles, which also made up 5% of the total; vehicles, at 4%; precious stones and metals, with 3%; and machinery, also with a 3% share.

On the one hand, export revenues for five of the top seven declined between 2012 and 2016. Fats, oils, and wax exports fell by 3% to end 2016 at $18.23bn, while mineral fuels and oil exports dropped by 14% to $14.79bn. Electrical equipment exports contracted by 7% to reach $8.16bn in 2016, while rubber and rubber articles exports fell by 15% to $5.66bn. Machinery declined by 2% over the period to end 2016 at $5.89bn. On the other hand, precious stones and metals exports almost doubled between 2012 and 2016, rising by an average 22% per annum to end 2016 at $6.37bn, while vehicle export revenues increased by an average 5% per annum, rising to $5.87bn, over the same period.

COMMODITIES & VALUE ADDITION GAINS: With commodity prices improving throughout 2016, six of the country’s top-seven exports recorded a strong performance in early 2017. According to the latest statistics from the MoT, rubber and rubber articles exports surged by 50% y-o-y to $5.39bn in the first eight months of 2017, while fats, oils and wax exports jumped 43% to hit $15.23bn. Mineral fuels and oils exports rose by 49% to $13.24bn and vehicle exports were up 21% at $4.5bn. Electrical equipment exports meanwhile rose by 6% to $5.59bn. However, exports of machinery declined by 4% to $3.82bn, while precious stones and metals exports also fell by 24% to $3.73bn. For their part, processed metals rose rapidly in the first eight months of 2017. The MoT reports that tin exports jumped 60% y-o-y in the period from January to August 2017 to $983m, while iron and steel exports were up 77% to hit $1878m. Aluminium exports increased by 35% y-o-y to reach $335m, and chemicals and allied products exports grew by 44% to $545m. Total non-oil exports rose by 17% in the first eight months of 2017 to $98.78bn, against $83.89bn in the same period of 2016.

EXPORT PARTNERS: Indonesia’s largest export partner is ASEAN, with the MoT reporting that ASEAN-bound exports rose $235.5m, or 0.75%, in 2016, to $33.83bn, or 23.3% of total exports. This trade growth was driven primarily by exports to the Philippines, up 34.4%, from $3.92bn in 2015 to $5.27bn in 2016. Meanwhile, exports to Vietnam also recorded a sharp increase in 2016, rising by 11.15%, or $305.4m, to $3.05bn.

Outside of the ASEAN bloc, Indonesia’s largest bilateral trade partners are China, Japan and the US.

China is the country’s largest trade partner in terms of total trade, which rose from $51.05bn in 2012 to $52.45bn in 2013, before falling to $48.23bn in 2014 and $44.46bn in 2015, according to MoT data. Trade volumes rose to $47.59bn in 2016, though Indonesia maintains a large and growing trade deficit with China. Total imports from China increased by an average 0.8% per annum between 2012 and 2016, from $29.39bn to $30.8bn, while exports declined by an average 8.8% per annum over the same period, falling from $21.66bn to end 2016 at $16.79bn. As a result of this Indonesia’s trade deficit with China has nearly doubled, rising from $7.73bn in 2012 to $14.01bn in 2016.

JAPAN & SINGAPORE: Bilateral trade between Indonesia and its next-largest trade partners, Japan and Singapore, has been in decline in recent years.

Japan is the country’s second-largest trade partner, with total trade between the two standing at $29.08bn in 2016. However, this marked the fifth consecutive year of declining trade volumes; trade with Japan fell from a high of $52.9bn in 2012 to $46.37bn in 2013, $40.13bn in 2014 and $31.28bn in 2015. Exports to Japan have decreased significantly in recent years, down 46.6% between 2012 and 2016, from $30.14bn to $16.1bn. This was driven by a significant decline in energy exports, which fell from $12.9bn in 2012 to $2.9bn in 2016. Total imports declined by 42.9% over the same period from $22.78bn to $13bn. Indonesia maintains a trade surplus with Japan, albeit a shrinking one, which stood at $3.11bn in 2016, against $4.76bn in 2015, $6.1bn in 2014 and $7.8bn in 2013. Similar trends can be witnessed in trade with Singapore, which fell from a high of $43.22bn in 2012 to $42.27bn in 2013, $41.91bn in 2014, $30.66bn in 2015 and a five-year low of $26.41bn in 2016. Exports have dropped by 31% since 2012, when they totalled $17.14bn, to $11.25bn at the end of 2016, while imports were down 44.25% from $26.09bn to $14.55bn. Indonesia’s trade deficit with Singapore also fell over the same period, from $8.95bn in 2012 to end 2016 at $2.69bn, a drop of 70%.

US TRADE GROWTH: Although ASEAN trade growth remains stable, declining trade volumes with traditional bilateral partners has made the country’s trade relationship with the US increasingly important.

The US was Indonesia’s fourth-largest trade partner in 2016, with total trade between the two standing at $23.44bn in 2016, $23.83bn in 2015, $24.7bn in 2014, $24.76bn in 2013 and $26.48bn in 2012. Although 2016 marked the fifth year of declining trade receipts, this contraction was driven by falling imports from the US, which sank from $11.6bn in 2012 to $9.07bn in 2013, $8.17bn in 2014, $7.6bn in 2015 and $7.3bn in 2016. Exports, meanwhile, have risen from $14.87bn in 2012 to $16.14bn. Indonesia’s trade surplus with the US has therefore more than doubled, from $3.27bn in 2012 to $8.84bn in 2016. However, this could prove problematic given shifting US trade priorities.

President Trump has initiated a raft of proposed protectionist trade measures and an anti-free trade agenda that has, as of November 2017, included withdrawal from the TPP and plans to investigate countries with which the US maintains a significant trade deficit, including Indonesia. As a recent US investigation into Indonesian biofuel dumping has shown, the country remains at risk of potential US trade sanctions, making the pursuit of bilateral agreements with the EU and Australia an ever greater priority (see analysis).

FDI RISING: Although bilateral trade and export revenues have been in decline in recent years, FDI and domestic direct investment (DDI) inflows have recorded robust growth, driven by rising ASEAN and regional investment. FDI inflows (excluding the banking and oil and gas sectors) have risen sharply in Indonesia since 2011; BKPM data shows that total FDI grew by 31% in 2012 to Rp229.7trn ($17.3bn), up from Rp175.3trn ($13.2bn) in 2011, before rising by 17.7% in 2013 to reach Rp270.4trn ($20.4bn). FDI inflows increased by 13.5% and 19.2% in 2014 and 2015, respectively, to end 2015 at Rp366trn ($27.6bn), and rose a further 8.3% in 2016 to close at Rp396.5trn ($29.9bn).

However, growth in FDI inflows moderated somewhat in the first quarter of 2017, with BKPM reporting that FDI fell to its lowest levels in five years, up 0.9% y-o-y to Rp97trn ($7.3bn), compared with a 2.1% increase in the preceding quarter. Weaker FDI inflows were attributed to ethnic and religious tensions in the lead-up to Jakarta’s gubernatorial elections in 2017, as well as broader geopolitical uncertainty. However, BKPM has questioned the significance of these events for investment, with Lembong arguing that investors are more influenced by government action on liberalisation and infrastructure development than sectarian tensions during elections. The latest figures from BKPM may bear this out: FDI inflow was up 10.6% y-o-y in the second quarter of 2017, to Rp110trn ($8.3bn).

DOMESTIC SUPPORT: External uncertainty continues to dampen the outlook for FDI growth in 2017, making DDI an important support pillar for the continued expansion of trade. Some fear heavy corporate tax cuts in the US could prompt a global tax war, which could see countries such as Singapore and Thailand move to reduce their own corporate income taxes to similarly low rates in a bid to remain competitive.

Although international media reported in August 2016 that Indonesia was considering cutting its 25% corporate income tax rate to 17%, no firm plans to do so had been announced by November 2017, putting the country at risk of rising competition from regional competitors looking to attract new investment.

However, Indonesia continues to benefit from its huge population, rising income, and repatriated investment and capital in the wake of a 2016 tax amnesty programme, which saw nearly Rp5000trn ($376.9bn) in hidden assets declared (see Economy chapter). DDI rose by 16.9% y-o-y to Rp61trn ($4.6bn) in the second quarter of 2017, according to the most recent available figures from BKPM, of which Rp10trn ($754m) was channelled into construction, Rp9.5trn ($716m) was invested in the food industry and Rp7.4trn ($558m) into mining. DDI has grown steadily since 2011, rising from Rp76trn ($5.7bn) to Rp92.2trn ($6.9bn) in 2012, Rp128.2trn ($9.7bn) in 2013, Rp156.1trn ($11.8bn) in 2014, Rp179.4trn ($13.5bn) in 2015 and a six-year high of Rp216.3trn ($16.3bn) in 2016.

MAJOR INVESTORS: Singapore was Indonesia’s largest source of realised FDI in the second quarter of 2017, with their combined investment projects valued at $1.6bn, followed by Japan ($1.4bn), China ($1.3bn), Hong Kong ($600m) and South Korea ($500m). According to BKPM, the metal, machinery and electronics industry was the most popular sector for FDI, with $1.1bn of realised investments in the second quarter of 2017, shortly followed by mining with $1bn. As ASEAN Economic Community integration has increased in recent years, Indonesia has also benefitted from rising intra-ASEAN investment inflows. In February 2017 the Foreign Policy Community Indonesia reported that Indonesia accounted for 42.7% of total intra-ASEAN investment in 2016, with ASEAN FDI valued at $9.49bn.

BELT & ROAD BENEFITS: China is set to become a much larger investor in the country over the medium term, as it moves to implement its One Belt, One Road policy, a far-reaching doctrine envisioning development of a Chinese-led Eurasian economic and trading area to rival the US-dominated transatlantic area.

The strategy involves China underwriting billions of dollars of infrastructure investment in countries located along historic Silk Road trade routes, with many ASEAN countries set to benefit. China hosted its Belt and Road Forum for International Cooperation in Beijing in May 2017, the largest gathering of foreign heads of state there since the 2008 Olympics. Several days later Bambang Brodjonegoro, minister of national development planning and head of the National Development Planning Agency, told media Indonesia is seeking up to $28bn of Chinese investment under the One Belt, One Road initiative. Investments will be concentrated in the provinces of North Sulawesi, North Sumatra and North Kalimantan, which are strategically located along China’s proposed Maritime Silk Road, an ancient trade route spanning the South China Sea. Currently planned projects include seaports, airports and toll roads connecting industrial areas to the ocean, as well as projects focused on agricultural plantations, renewable energy and mineral processing, including smelters. Tourism developments are also expected to benefit from Chinese investment, according to Brodjonegoro.

PACKAGE OF REFORMS: The government remains committed to attracting new FDI to support economic growth, and in addition to loosening some raw export restrictions, President Widodo has also revised the DNI, announcing plans for a “big bang” economic reform package in February 2016. This was the 10th in a series of 16 stimulus and deregulation packages launched between September 2015 and August 2017.

Under the proposed package, restrictions across more than 50 sectors were targeted for amendment, including cold storage, crumb rubber processing, warehousing, tourism and e-commerce. The revisions, which came into effect in May 2016, focused on stimulating foreign investment under a three-pronged approach that includes expanding the lines of business requiring a partnership between foreign investment companies and local MSMEs, increasing permissible foreign ownership levels for investments in certain sectors provided the investors are from ASEAN member states, and removing several business areas that had been subject to foreign investment restrictions under the previous iteration of the DNI, which was amended in 2014 through Presidential Regulation No. 39.

E-COMMERCE: Under Presidential Regulation No. 44 of 2016, e-commerce businesses are now open to 100% foreign ownership, albeit with some requirements for MSME partnerships. The opening of e-commerce to foreign retailers presents significant new investment opportunities (see Retail and E-Commerce chapter). Online sales in Indonesia grew by 22.6% in 2016 to $5.65bn, up from $4.61bn in 2015, with sales expected to reach $10.34bn in 2019, according to market research firm Statista. Management consultancy McKinsey reports that Indonesia could become one of the world’s fastest-growing e-commerce markets over the medium term, with the country’s digital economy expected to add up to $150bn to its GDP by 2025. E-commerce could comprise 7-8% of the total retail market by 2020, up from around 1% in 2016. In June 2016, just one month after the DNI restrictions were lifted, local media reported that online retail giant Amazon is planning a major investment drive in the country. Furthermore, Indonesia’s Lippo Group announced plans to invest $500m in an e-commerce venture called in February 2015, while Chinese online retailer Alibaba announced in June 2017 that it plans to open a new data centre in Indonesia, following its $1bn acquisition in April 2016 of Singapore-based Lazada Group, which sells clothes and electronics in six South-east Asian nations, including Indonesia. In May 2017 Chinese firm JD was reported to be negotiating an investment into Indonesian e-retailer Tokopedia, which could bring the value of the company to over $1bn.

COLD STORAGE: Other noteworthy revisions to the DNI saw manufacturing distribution and cold storage businesses’ foreign ownership limits increased from 33% to 100%. This presents another significant opportunity for foreign investment. In May 2016 the Indonesian Cold Storage Association (ARPI) reported that the country requires a further Rp12trn ($904.5m) of investment to meet current demand. The seafood industry needs an additional 6.5m tonnes of cold storage capacity, as does the processed chicken industry (3.5m tonnes), and fruits and vegetables (8.5m tonnes). For each tonne of cold storage capacity, Rp10m ($754) of investment is required, according to ARPI. The sector’s expansion has been limited in recent years, with investment in cold storage growing by a cumulative 5%, or Rp4trn ($302m), from 2013 to 2016.

HEALTH CARE: In the health care sector, the limits for raw pharmaceutical materials manufacturing were raised from 85% to 100%, while business management consultancy, hospital management, health support, and laboratory and medical clinic businesses are also now all open to full foreign ownership.

The prospects for health care investment are therefore bright, and in April 2017 the France-based bank BNP Paribas reported that the country’s large population, supportive government policies and rising investment in the industry had created strong opportunity for future expansion, with the health care market set to triple in value from $7bn in 2014 to $21bn in 2019. According to the bank, Indonesia’s currently under-served health care market, which has struggled with low hospital bed- and doctor-to-patient ratios, has created new opportunities for hospital and clinic investment, particularly as the authorities move to achieve universal health care coverage. At present, with government spending accounts for just 38% of total health expenditure in the country (see Health chapter).

HOSPITALITY: In the hospitality sector, restaurant ownership limits were raised from 51% to 100%, bar and cafe ownership from 49% to 100%, and the film industry from 49% to 100%. As such, this is another area with significant potential for future investment. In December 2016 Arief Yahya, minister of tourism, announced Indonesia is targeting 15m international arrivals in 2017, a 25% increase over 2016 levels, with 20m visitor arrivals forecast for 2019. Visitor arrivals rose by 20% in 2016 to 12m, up from 10.4m in 2015, while the tourism industry accounted for 11% of GDP in 2016 with visitor spending reaching Rp172trn ($13bn). Rising domestic consumption could also benefit hospitality investors; McKinsey report’s that Indonesia’s urban consuming class – individuals with more than $10 of daily disposable income – is rising by 5m people annually and is forecast to reach 86m by 2020. Other sectors opened to 100% foreign investment under the new DNI include toll road operators, non-hazardous waste disposal and treatment, and crumb rubber.

PIONEERING INDUSTRIES: In addition to loosening DNI restrictions, the government is hoping to bolster investment in a host of pioneering and priority sectors, with an emphasis on value-added production of its abundant natural resources. Indonesia’s corporate income tax rate is currently set at 25%, one of the highest in ASEAN, although investors in so-called pioneering industries benefit from tax holidays.

Under the Ministry of Finance Regulation No. 103 of 2016, tax holidays are granted for companies generating income out of their principal business activities listed on principal business licences, including expansion or changes in investment. Holidays are granted on between 10% and 100% of the payable corporate income tax for between five and 15 fiscal years, with the possibility of extending the holiday to 20 years. Pioneering industry criteria includes any industry with extensive interconnection that provides additional added value and high externality; those that introduce new technology and industries that have strategic value for the national economy, including base metals industries, natural oil refining, petrochemicals, and the manufacturing of agricultural, forestry and fishery products. The minimum investment value for pioneering industries is set at Rp1trn ($75.4m), with 10% to be deposited in domestic banks. Only businesses established after August 15, 2011 can qualify for this status.

ECONOMIC ZONES: The MTDP, meanwhile, identifies investment priority sectors such as power generation, labour-intensive industries (textiles, food and beverages, furniture and toys), and sectors where the country is particularly dependent on imports, including chemicals and pharmaceuticals products, iron and steel. Value-added export-oriented industries such as electronics, machinery, rubber products, automotive and seafood, as well as paper, cocoa and sugar products are also considered priority industries.

The government is hoping to attract investment in these sectors through the expansion of its network of special economic zones (SEZs), designated areas where natural resources mined or harvested in and around the zone are processed. According to a February 2017 report by Dezan Shira & Associates, the country’s network of nine SEZs is expected to increase to 25 by 2019.

INFRASTRUCTURE BENEFITS: These areas offer investors cost-effective access to basic infrastructure, with SEZs becoming increasingly targeted towards specific industries. They also offer preferential access to regulatory infrastructure, as well as attractive tax incentives.

Under President Widodo’s sixth stimulus package, released in November 2015, several new incentives were established to encourage SEZ investment. These include income tax reductions of between 20% and 100% for up to 25 years based on the value of the investment. For example, a Rp500bn ($37.7m) investment garners a 15-year tax holiday, and a Rp1trn ($75.4m) investment is eligible for a 25-year holiday.

In addition, those investing in SEZs benefit from value-added tax (VAT) exemptions on the importation of raw materials, as well as on manufactured goods that are sold within Indonesia. Importantly, SEZ investors are eligible for specially devised 30-year leases for land, with the possibility of an extension for another 10 years.

LEGAL REFORMS: Government Regulation No. 24 of 2009 emphasised regulatory support for development of industrial estates as a centre for manufacturing industries in the country, with estates required to be supported by infrastructure, facilities and services. The third generation of industrial estates, as envisioned by the government, would target specific sectors and core competencies, with a focus on research and development, innovation, and integration with other sectors of the economy. The German development agency GIZ estimated that demand for industrial land stood at around 1000 ha annually in 2013, with 60% of industrial land demand concentrated in West Java.

The government’s 16 stimulus and deregulation packages also target industrial estate development, and in November 2015 Imam Haryono, the MoI’s director-general for industrial estate development, told local media that Government Regulation No. 24 of 2009 was being revised to offer tax reductions for industrial estates, from both the central government and local administrations. Central government incentives include reduced rates of corporate income tax, VAT and import duties, while local incentives would see a reduction in local taxes and levies, including property-transfer fees, and land and property taxes. The MoI offers incentives based on the estates’ geographic area, or WIP. With those located in Java, North Sulawesi, East Kalimantan, and North and South Sumatra except for Batam, Bintan and Karimun being known as I WIP, and those estates located on Papua and West Papua known as II WIP. According to the MoI, II WIP estates can be expected to receive the most benefits.

INDUSTRIAL ESTATE GROWTH: These changes are part of a plan to build at least 14 industrial estates outside of Java by 2020, requiring a total investment of Rp192.44trn ($14.5bn), of which Rp55.45trn ($4.2bn) would be supplied by the government for basic infrastructure development. The plan would see an additional 22,484 ha of land allocated to estate development, with 930,000 jobs to be created.

The new regulations have supported the rapid growth of industrial estates in the country. In June 2012 the Industrial Estate Association reported that Indonesia had a total of 27,320.6 ha of available industrial land; by the end of 2017 this figure had risen to 54,214.83 ha of land for industrial production plants.

OUTLOOK: With investment in industrial zones, SEZs, infrastructure and priority industries set to increase in the coming years, Indonesia remains extremely well positioned to capitalise on its position as a regional trade and investment leader. Although low commodity prices and external volatility have affected exports and challenged producers, the recovery of commodity prices should support growing export momentum, even as protectionist policies weigh on the near-term outlook. As the government turns its attention to upgrading and expanding infrastructure and regulatory reforms, the investment and business climate are both set to improve significantly, supporting Indonesia’s future economic development, and lending an optimistic mid-term outlook to trade and investment.

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The Report: Indonesia 2018

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