A stagnant 2014 had threatened to lead into a frustrating 2015 for Indonesia’s economy, but a series of reforms launched by president Joko Widodo has brought some of the smiles back, after FDI showed an increase last year. Ranajit Dam speaks to lawyers about the impact the packages have had on both investor interest as well as the ensuing legal work

After slowing to a crawl for more than a year, the engine of Indonesia’s growth appears to be revving up again, even if it is not quite hitting the speeds it was a couple of years ago. In September last year, investor sentiment towards Southeast Asia’s largest economy had soured, with President Joko Widodo – popularly known as Jokowi – struggling to implement much needed reforms, hobbled as he was by rifts within his own political party and squabbles among government agencies. It was at this point that he launched a series of stimulus packages, which was aimed at luring more investment, boosting consumer spending, and supporting a rupiah that appeared to be in free fall.

The first of the series of packages included streamlining dozens of overlapping trade and industry regulations, simplifying the permission process for “strategic projects”, and easing rules for foreigners opening bank accounts in foreign currency. “I want to underline that this economic package is aimed at stimulating the real economy, which will have an impact to our economy in the future,” Jokowi was quoted as saying at the time.

Erwandi Hendarta, managing partner of Hadiputranto, Hadinoto & Partners, says that in total the Jokowi government has released a total of eight stimulus packages over the past six months, designed to address a wide variety of issues. “The stimulus packages are wide-ranging and cover things such as price cuts for import duty and domestic fuel to enhance Indonesia’s attractiveness as a manufacturing hub, lesser red tape in licensing processes for new business ventures, tax incentives to promote more investment in Indonesia’s underdeveloped regions as well as in capital and/or labour-intensive industries deemed ‘strategic’ by the government (such as oil refineries), and land-law reforms to make it clearer and easier for investors to acquire land necessary for new developments,” he says. “The last one is particularly aimed at infrastructure developments.”

On the face of it, the measures appear to be working. According to the Investment Coordinating Board, investment from overseas rose to $7.9 billion in three months through December, up 7 percent from the previous quarter. It went up 3 percent in 2015 to $29.3 billion, after stagnating in 2014, a sign that investor interest was starting to return to the country.

The second installment of the “massive deregulation” package arrived in less than a month and included reducing the time required to process some investment permits. Defrizal Djamaris, founder partner of Kudri & Djamaris, noted that the policy that benefited investors most, particularly those investing at least 100 billion rupiah, and/or employing 1,000 workers. “The package focuses on improving the investment circumstances and maintains the stability of the exchange rate,” he says. “It also shortens the time required to get the investment license, from weeks or even months, to about three hours. The investment license, which covers three documents, namely the principle license, certificate of incorporation, and the issuance of tax number, will attract more investment to Indonesia.”

CHALLENGES REMAIN

Djamaris notes, though, that despite the good news, challenges remain for investors in Indonesia. “Bureaucracy and legal certainty are some of the common problems that investors face in Indonesia,” he says. “The second package has fixed some of the bureaucratic problems by shortening the process of investment licensing. And the government is now trying to revise regulations to give legal certainty to investors. For instance, it passed Regulation No. 78 of 2015, which fixed a long-standing problem by providing certainty in terms of the system of calculating wages. However, the central government still needs to supervise local governments to ensure a working bureaucratic system and legal certainty at every level of government. It also needs to harmonise state and central government regulations.”

Hendarta notes that while any reforms in the areas that the stimulus packages are trying to address are clearly positive steps forward for Indonesia, the reaction from the domestic and foreign investment communities has been that the reforms do not go far enough. “For example, significant concerns still remain that unless the Government takes steps to look at a complete overhaul of Indonesia’s labour law regime, Indonesia’s aspirations to become a manufacturing hub for ASEAN will likely remain just aspirations,” he says.

AEC PREPARATIONS

The ASEAN Economic Community (AEC) dominates much of the discussions when it comes to the region’s economy, and much of the talk of late has centered around the readiness of various countries. Hendarta believes that in general, Indonesia’s preparations are going well. “One needs to bear in mind that most of the AEC’s initiatives were launched and completed years ago,” he says. “For instance, the market access liberalisation for both goods and services was agreed and implemented well before 2015. Indonesia has already passed all the import duty cuts required under the ASEAN Trade in Goods Agreement, or ATIGA. In some areas, such as competition law, Indonesia is well ahead of other ASEAN countries. Whereas some countries, such as the Philippines, only passed their competition laws in 2015, Indonesia has had a functioning competition regime since 2000.”

Of course, he says, there is still room for improvement. “There are some technical regulations that are not yet completely up to date, such as the Negative Investment List, which sets out the lines of business that have foreign shareholding restrictions,” notes Hendarta. “The current negative list is not yet 100 percent in line with market access commitments under the AFAS (ASEAN Framework Agreement of Services) though we heard that this may be rectified soon. Another example would be commitments to harmonise forms and regulations for product registration; this has yet to happen (though Indonesia is by no means alone in this). These are relatively minor issues.”

According to Hendarta, more serious for Indonesia is the fact that it still maintains a lot of non-tariff barriers, which is not in line with the AEC’s goal to increase trade among ASEAN members. However, he says it is important to bear in mind that “Indonesia is not alone in this respect, and this is partly due to a lack of serious sanctions in the ASEAN framework.” He adds, “For instance, Indonesia is currently facing a complaint from New Zealand at the World Trade Organization in relation to certain measures concerning import of animal and horticultural products. Thailand has joined in this dispute as a third- party participant, also complaining against Indonesia. So Thailand chose to use the WTO forum, not ASEAN, to contest these measures.”

Djamaris notes that under the AEC blueprint, there are 12 priority sectors that will be integrated by the government, namely agro-industrial goods, automotive, electronics, fisheries, rubber-based industry, woodbased industries, and textiles, air transportation services, health, tourism, logistics, and information technology. “In the era of AEC, these sectors will be implemented in the form of the release of the flow of goods, services, investment, and labour,” he says. “So far, the steps that have been taken by the Indonesian government to face the AEC are strengthening economic competitiveness, establishing an ‘I Love Indonesia’ branding program, strengthening the SME sector, improving infrastructure, and improving the quality of human resources.

LOOKING AHEAD

When asked about what kind of work is keeping his law firm busy, Djamaris of Kudri & Djamaris says that at present, it is handling a number of issues related to restructuring and bankruptcy. Meanwhile, Hendarta says that HHP is busy with a variety of matters. “For example, there are foreign direct investment clients who seek our assistance to structure joint venture agreements and shareholders agreements,” he says. “We are also working on a couple of debt-restructuring assignments. Questions relating to regulatory framework and the consistency of regulators and courts in dealing with certain matters are some of the top questions and issues that our clients ask us about.”

For the foreign direct investment community, Hendarta says that one litmus test on the horizon for the government is the next round of revisions to Indonesia’s Negative Investment List, which will be released in about two months’ time. “This list dictates what business activities foreign investors can and cannot invest in,” he says. “The government has acknowledged that to achieve its growth goals, it will need to attract foreign direct investment, and accordingly the revision to the Negative List is being keenly monitored as a test of whether the government is truly serious about attracting this much needed foreign direct investment. Another bill that investors are currently talking about is the banking law bill, which has been delayed for some time now.”

Djamaris adds that one area that investors in Indonesia need to think about this year is tax. “The Indonesian government, through the Directorate General of Taxation, together with the police and the attorney-general, are prioritising the enforcement of the tax law in order to maximise state income and also to minimise loss in tax revenues caused by criminal actions in taxation,” he says. “Because of that, investors need to be more compliant when it comes to fulfilling their tax obligations.”

In terms of legal work, he expects to see a rise in infrastructure work, given that the government is massively developing infrastructure at present. “Infrastructure-related projects and project financing will be the main trend in Indonesia’s legal market this year, he says. “Also, with regard to the AEC, projects related to investment will also become part of the trend.”

Hendarta agrees. “We are currently working on infrastructure and electricity projects. Given the push by the government, we expect that this trend will accelerate in the coming months,” he says.

Sceptical foreigners could cut short Indonesian stock market rally

By Fransiska Nangoy of Reuters

Indonesia’s stock market has outperformed its Asian peers over the past six months on hopes of an earnings boost from President Joko Widodo’s long-promised reforms and lower borrowing costs. But foreign investors aren’t betting on it.

The apathy shown by foreigners could spell trouble for the market facing off against a surfeit of challenges including plummeting prices for Indonesia’s key commodities, a slowdown in key trading partner China and red tape and reactionary politics at home.

“There are currently no tailwinds that can help the outlook for stocks since the earnings prospects, with a few exceptions, are not good,” says Mark Mobius, executive chairman of the Templeton Emerging Markets Group at Franklin Templeton Investments.

Yet, local investors seem unfazed by the bumpy road ahead and have been buying into equities, encouraged by a flurry of steps taken late last year by Widodo to boost investment and simplify the nation’s notoriously complex regulations.

That helped keep losses in Indonesia’s main stock index to just 2.6 percent over the past six months, compared with an almost 18 percent slide in the MSCI Asia Pacific ex Japan Index.

All the same, foreigners remain cautious after the disappointment of Widodo’s early promise on reforms.

“Unless Jokowi is able to reverse the situation the outlook for Indonesia is not good,” Mobius says, referring to the president by his popular name.

Indeed, frustrated by policy confusion and bottlenecks in transportation and investment, foreign investors have voted with their feet. A weak rupiah currency and plummeting prices for Indonesia’s key export commodities have added to the economic gloom.

Foreign investors sold a net 2.3 trillion rupiah of stocks in January, adding to the 22.6 trillion rupiah of net sales for the whole of 2015. Free float foreign ownership in MSCI Indonesia fell to 75.7 percent in the fourth quarter, the lowest since 2008, according to Morgan Stanley data.

Contrast this sentiment with the optimism of local firm Ciptadana Asset Management, which is buying into Indonesia’s infrastructure and construction story.

It’s not a question of whether to be bullish or bearish, but “how bullish do you want to be,” says Andry Taneli, a fund manager with the Jakarta-based firm, who says he believes the worst of the domestic economic downturn is over.

Southeast Asia’s largest economy is forecast to have expanded at the slowest pace in six years in 2015, and investors have been disappointed by long delays in infrastructure spending.

To support growth, Bank Indonesia cut its key interest rate by 25 basis point in January for the first time in 11 months, signalling a start of an easing cycle.

Cholis Baidowi, chief investment officer at CIMB Principal Asset Management in Jakarta, who helps manage 5.8 trillion rupiah, says he expects lower borrowing costs to help drive the economy and boost corporate earnings growth by 10 percent, compared with last year’s 13 percent decline.