Indonesia has registered robust trade surpluses and attracted increased foreign direct investment (FDI) inflows in recent years, with notable expansion taking place since the easing of economic disruptions caused by the Covid-19 pandemic. Significant upgrades to trade, investment, immigration, labour and real estate legislation have been implemented in the years since 2020, with international organisations increasingly keen to do business in Indonesia, particularly in the country’s multiple designated trade and investment zones.
Trade Authority
The Ministry of Trade (MoT) is the government authority that oversees trade regulation and aims to strengthen and form trade alliances. Additionally, the MoT is committed to educating the business community and broader population about trade procedures and processes. In recent years the MoT has worked to eliminate some of the barriers to trade in the country through collaboration with private and international business communities. Previous trade regulations have been described as too protectionist in nature, and concerns about a perceived lack of transparency persist, along with challenges regarding the interpretation and implementation of trade laws.
Indonesia’s regional governments have considerable autonomy. While the MoT’s efforts to clarify trade laws are crucial, so too is the push to harmonise the activities of regional and central governments. This synergy is vital for the National Long-Term Development Plan 2025-45, unveiled in June 2023 by President Joko Widodo, better known as President Jokowi, and the Ministry of National Development Planning.
New Import Regulation
MoT Regulation No. 36 of 2023 on Import Policy and Import Arrangement was issued in December 2023, revoking the previous regulation, which was rolled out in 2021 and amended in 2022. The new regulation then came into force in March 2024. The general aim of the new legislation is to further streamline import policies and procedures in order to make trade in Indonesia easier for businesses.
Key among the changes are alterations to import business licence coding and extensions to the range of allowances and exemptions such licences afford traders. Notably, goods imported under previous licence specifications are still eligible for trading under the new policy, while guidance is also available for traders to update pre-existing licences to new codings. Procedures surrounding technical changes to import licences – for example, if the nature of an importer’s business changes – have been simplified, and while only company head offices can hold a licence, branch offices involved in the same type of trade can use the same licence. Some stakeholders voiced concerns that the 90-day transitional period may be insufficient and could cause significant disruption to supply chains due to companies not being suitably prepared for the rollout.
Investment Authority
The Indonesia Investment Coordinating Board (BKPM) works to align investment policy, services and activity with relevant public and private bodies. Established in 1973, the entity has undergone multiple operational changes. It was officially restored to ministry status in 2009 and assigned the task of attracting higher inflows of domestic and international private investment into the economy. BKPM became a fully fledged ministry, the newly established Ministry of Investment, in 2021.
Central to its mandate is drawing investment into the government’s priority sectors, which include manufacturing, mining, tourism, ICT and digital economy, and financial services. BKPM oversees cross-sectoral business licensing and investment facilitation, acting on behalf of other government bodies, and tailoring end-to-end services to suit each company and investor’s unique requirements. Licences for firms and individuals seeking to enter one of the country’s special economic zones (SEZs) are applied for and issued through the government’s online single submission (OSS) website.
New Investment Regulations
Indonesia’s investment legislation has undergone substantial revision in recent years, with attracting higher levels of FDI central to the current government’s economic development strategy. Law No. 11 of 2020 on Job Creation (Job Creation Law) was initially passed in October 2020 and enacted the following month. The omnibus reform package was intended to streamline labour, tax, and investment laws and processes with a view to boosting national human capital and FDI inflows. Notable alterations to investment law, prompted by the Job Creation Law, were rolled out in 2021. These changes include the revocation of more than 250 business activities, as well as the permission of 100% foreign business ownership across all sectors – thereby opening key areas of the economy to FDI, including ICT, health, transport, energy, mineral resources and construction. There are 46 business activities that remain subject to specific criteria and government clearance.
Meanwhile, the country’s negative investment list was reduced from 20 to seven items – cannabis-related activities, gambling, fishing of endangered species, coral extraction, production of alcoholic items, chemical weapons manufacturing and industries that use ozone-depleting substances. Furthermore, a priority list was created to outline the areas of the economy targeted by the government for increased FDI in order to drive broad-based economic growth. Around 245 business activities listed on the priority list qualify for fiscal and non-fiscal incentives. Some of the key activities targeted for investment are: pioneer industries, export-oriented manufacturing, capital-intensive industries, national infrastructure development, digital economy, and research and development (R&D).
However, the law faced some resistance from labour organisations and was declared conditionally unconstitutional by the Constitutional Court on procedural grounds in November 2021, and the government was given two years to rectify the law in line with the ruling. As a result, in 2022 the law was reissued as an emergency government regulation in lieu of law, and Law No. 6 of 2023 was enacted the following year with its key provisions largely intact (see Legal Framework chapter).
Foreign Investment
Indonesia experienced a 13.7% increase in FDI in 2023 for a total of Rp744trn ($48.4bn) – a figure that excludes investment in financial services, and oil and gas activities. Contributing to this growth has been a post-pandemic surge in FDI into various sectors of the economy, particularly in base metals. This can be seen most notably in nickel processing industries, which received $11.8bn in FDI in 2023, amounting to the highest total for all non-financial, or oil and gas industries. Logistics, telecommunications, pharmaceuticals, mining, and pulp and paper industries also received significant inflows of FDI. The countries contributing the highest amounts of FDI into Indonesia in 2023 were China, Hong Kong and Singapore.
Imports & Exports
Indonesia closed 2023 with an annual trade surplus of $36.9bn, 32% lower than the surplus of $54.5bn seen in 2022. A decline in export value during 2023 presents a challenge to the relevant authorities, given that driving export trade is a core component of Indonesia’s overarching economic development agenda. A drop in global commodity prices played a role in lower export values for 2023, with total export value decreasing 11.3% to $258bn. Non-oil and gas exports, which accounted for $242.9bn, or 94% of the total, were down by close to 12%.
The drop in export trade was a result of declines in key sectors, with manufacturing exports contracting 9.3%, agriculture and forestry exports falling by just over 10%, and exports from mining activities and other categories down by 21%. The top-five destinations for Indonesian exports in 2023 were China ($62.3bn), the US ($23.2bn), India ($20.3bn), Japan ($18.9bn) and Malaysia ($10.3bn). Those five countries accounted for 52% of total export value in 2023. Meanwhile, the top-five non-oil export categories, in terms of contribution to the total, were: mineral fuels (17.9%); animal, or vegetable fats or oils (11.7%); vehicles and accessories thereof (4.6%); ores, slag and ash (3.6%); and precious metals, jewellery and precious stones (3.1%).
Fourth quarter 2023 export data showed total export value rising from $20.7bn in September to $22.4bn in December, but momentum slowed at the turn of the year, with export value falling by nearly 8.1% in January 2024. The country posted a surplus for the month, with import value rising by 0.36%, leaving a balance of $2bn. The top-five export destinations by value during January 2024 were China ($4.6bn), the US ($1.9bn), India ($1.8bn), Japan ($1.5bn) and South Korea ($792m).
Total imports reached a value of approximately $222bn in 2023, which marked a 6.5% decline from 2022, when the country’s total import value stood at $237.4bn. The five-largest source markets for imports in 2023 were China, Japan, Thailand, South Korea and the US, with Indonesia shipping in non-oil and gas goods, equipment and merchandise at values of $62.2bn, $16.4bn, $10.1bn, $9.6bn and $9.2bn from those markets, respectively. ASEAN countries supplied imports valued at approximately $31.1bn, while imports originating in EU countries were valued at just over $14bn.
Trade Alliances
Indonesia was party to 18 free trade agreements (FTAs) with a total of 30 FTA member countries as of September 2023. These included pacts with Australia, Chile, Japan, Mozambique, Pakistan, South Korea and the European Free Trade Association. Indonesia also benefits from six trade agreements as a member of ASEAN – which consist of the ASEAN Trade in Goods Agreement, a joint pact with Australia and New Zealand, and partnerships with China, India, Japan and South Korea. The country also benefits from a preferential trade agreement among D8 member states – which is made up of Bangladesh, Egypt, Iran, Malaysia, Nigeria, Pakistan and Turkey – as well as the Regional Comprehensive Economic Partnership (RCEP).
The signing and bringing into force of the RCEP is a significant development for Indonesia and the other 14 countries involved. That number comprises all 10 ASEAN member states, along with Australia, China, Japan, New Zealand and South Korea, accounting for 30% of both global GDP and population. It was launched in Indonesia in January 2023. The RCEP eliminates around 92% of previously existing trade tariffs between member countries, and is seen in Indonesia as a step in boosting access to regional value and supply chains.
While the MoT is working to expand trade and investment cooperation with the world’s largest markets, it is also intent on harnessing the potential of emerging markets, with a strong regional focus on Latin America and Central Asia, as well as areas of Africa, Eastern Europe and South Asia. The government stated in January 2024 that it is working to finalise trade agreements with Egypt, India and Saudi Arabia. These countries are increasingly prominent in global trade and investment, with Egypt and India’s middle classes expanding and Saudi Arabia’s financial resources being harnessed to diversify its economy. Deals with Armenia, Bangladesh, Belarus, Kazakhstan, Kyrgyzstan, Mexico, Nigeria, Pakistan, Peru and South Africa are also targeted.
Business Incentives
Foreign direct investors in Indonesia are required to register a limited liability company with minimum capital of Rp10bn ($650,000). Corporate income tax (CIT) exemptions and tax holidays are offered in targeted sectors, with the duration and structure of such agreements depending on the size of the investment. A firm with an initial minimum investment value of Rp500bn ($32.5m) is eligible for 100% CIT exemption for a period of between five years and 20 years, or up to 25 years in one of the country’s special economic zones (SEZs). A range of additional benefits are extended to businesses operating in SEZs, one of those being a lower minimum investment value of Rp100bn ($6.5m) to qualify for 100% CIT exemption. Mini tax holidays, comprising a 50% reduction to CIT for a duration of five years, are offered to smaller-scale investment in priority and pioneering sectors.
Tax allowances and super tax deductions are also available for companies and investors who meet certain criteria. Tax allowances provide a 30% reduction in CIT spread over six years for 183 business activities, along with incentives related to dividends and extended tax losses. Super tax deductions give tax cuts to businesses engaged in R&D or education activities, as well as those operating in labour-intensive segments and sectors. Region-specific incentives are also offered, while Indonesia has double tax avoidance agreements with 71 countries as of 2024.
Import duty exemptions are granted to businesses importing machinery, goods and materials for processing for a period of three years, while VAT exemption is applied in the country’s four free-trade zones and over 1360 bonded zones. In addition, Indonesia is party to the US Generalised System of Preferences, which provides easier access to US market by applying lower import tariffs to around 3500 products.
Economic Zones
Indonesia’s 22 SEZs, as of August 2024, are designed to harness the strengths of specific regions and create linkages between small, medium and large companies, thereby facilitating value chain creation and expansion. The proliferation of SEZs has accelerated considerably under President Jokowi (see Industry chapter). In 2023 the country’s 20 SEZs attracted a total of approximately Rp177.5trn ($11.5bn) of investment, an increase from 2022 when 19 SEZs attracted Rp113.2trn ($7.4bn). By 2033 the government targets an additional $50bn of investment.
SEZs are divided into two groups: industrial and tourism. The industrial SEZs provide opportunities for entry into activities related to logistics, manufacturing, palm oil and rubber production, petrochemicals production, agriculture, and fisheries, among many others. The integrated tourism zones are spread throughout the country and are being developed to harness and showcase the unique characteristics of specific regions, driving job creation in the areas they serve.
Three different business models for involvement in SEZs are offered. One is operation as a commercial tenant and investor, while the other two are related to SEZ development. One of these presents opportunities for joint ventures with local developers to build and manage SEZs, while the other relates specifically to construction of essential infrastructure, including, but not limited to, roads, drainage systems and power generation, or regional infrastructure, such as airports, maritime ports, and railways. Fiscal incentives for investment in SEZs include income and value-added tax breaks; Customs and excise reductions and exemptions; and suspension of import duties. Non-fiscal incentives include simplified set-up and licensing facilities through BKPM’s OSS, 100% foreign-company ownership, land and spatial-planning allowances, modern infrastructure, as well as favourable labour and residency regulations.
Three new SEZs were approved for construction in 2023: Setangga SEZ in South Kalimantan, and Tanjung Sauh SEZ and Nipa SEZ, in the Riau Islands. All three will focus on industrial activities. In addition, a selection of state-owned enterprises have backed the development of a new integrated industrial estate in Central Java, offering land lease options to qualifying companies.
Visas & Land
The Golden Visa, launched in August 2023, is designed to attract high-value foreign investors into Indonesia by lowering previous visa-related minimum investment requirements. Businesses established with investment of $2.5m qualify investors for a five-year visa, with 10-year visas issued for investment of $5m. Individual investors not establishing a company can invest $350,000 in a variety of capital market facilities and instruments to receive a five-year visa, while the investment size doubles for a 10-year visa to $700,000. Corporate directors and executives can also obtain a five- or 10-year visa if their company invests $25m or $50m, respectively, into Indonesia’s economy. While the move represents a positive step, members of the business community suggest that the government may need to relax terms further and broaden the criteria to compete with ASEAN counterparts such as Malaysia, Thailand and Singapore. Indonesia issued 62 Golden Visas in January 2024.
Meanwhile, new land ownership laws were introduced in February 2021. Foreigners can now own apartments or landed houses, provided they are located in an SEZ, trade zone, bonded zone or industrial area. Meanwhile, the new law introduces various long-leasehold options for commercial investors. Both the ownership and leasehold allowances are subject to specific criteria (see Construction & Real Estate chapter).
Outlook
Indonesia is seeing benefits from its streamlining of business legislation. While fluctuating export receipts are of concern, the targeted expansion of manufacturing and mining value chains should enable the country to register growth in export value once commodity prices stabilise. Access to global supply chains granted by the enactment of the RCEP should also prove influential in driving export and investment receipts. Other challenges remain, not least the imminent change of government, officially taking place in October 2024. Conclusive first-round voting suggests a relatively smooth transition of administration ahead, and if a similar approach to foreign investment and economic development is maintained, Indonesia’s economic expansion should continue in the coming years.
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