Indonesia's haphazard rules are causing it to lag behind its Southeast Asian neighbours, according to the country’s own investment chief

The chief of Indonesia’s investment board has said that frequent and abrupt changes in regulations were discouraging foreign investors from putting money into Southeast Asia’s biggest economy.

Speaking to reporters, Thomas Lembong, head of the Investment Coordinating Board, warned that Indonesia is “still losing out” to neighbours such as the Philippines, Vietnam and Thailand.

He added that it is common knowledge that “sudden and constant changes in regulations create instability that is hard for any investor who’s willing to take a risk with their capital.”

“Thailand, Vietnam, Malaysia have more stable regulations,” he said.

Foreign investors have applauded some efforts by the government to streamline regulations, but say there are still too many restrictive regulations and a stifling bureaucracy.

Indonesia’s economy has been growing at about 5 percent annually in recent years, but policymakers have been frustrated by an inability to speed up the pace, partly due to sluggish consumption and tepid investment.

Last year, Indonesia recorded 8.5 percent more foreign direct investment (FDI) in rupiah terms than it attracted in 2016.

For 2017, FDI in sectors excluding banking and oil and gas was 430.5 trillion rupiah ($32 billion). For 2016, it reported an 8.4 percent increase in rupiah terms.

Indonesia has sought to scale back a so-called “negative investment list” that restricts or caps sectors open to foreign investors. In February 2016, President Joko Widodo’s administration opened up sectors ranging from e-commerce and telecommunication equipment in a move dubbed “Big Bang”.

But Widodo’s pledge to revise the list further is yet to materialise.

The revision “is in process. The president has instructed us to evaluate this but let’s abide by the existing one for now,” Trade Minister Enggartiasto Lukita said earlier.

In a speech recently, Widodo warned that Indonesia was losing out to neighbours in export markets.

“This big country of Indonesia is inferior to Thailand in terms of exports. With enormous resources and human resources, we are losing. There is something wrong and something has to be changed,” the state news agency Antara quoted him as saying in a speech at the Trade Ministry.

Lukita said overcomplicated regulations and red tape were also obstructing foreign trade agreements. Indonesia had only reached one free trade deal in the past eight years, with Chile, he said.

TAX INCENTIVES TO BE REVISED

Indonesia will revise its tax incentives and offer them to a larger number of business sectors, in a bid to attract more investment, the finance minister has said.

Tax allowance and tax holiday rules, last revised in 2016, had failed to attract a significant amount of investment into Southeast Asia’s biggest economy, Finance Minister Sri Mulyani Indrawati told reporters.

She did not give specifics, but said the government has in mind adding at least 20 business sectors to the 145 currently qualifying for allowances

Boosting investment has been an economic priority for President Joko Widodo, particularly since sluggish consumption has capped annual economic growth at around 5 percent for several years.

Lembong said that many manufacturing companies sought tax incentives before investing in Indonesia.

“Competitor countries are very responsive to issues like this. If we can execute this, there will be incoming (investment),” he noted.

The government is planning to change the minimum investment required to get a tax holiday, said Indrawati. At present, the minimum ranges between 500 billion rupiah ($36.7 million) and 1 trillion rupiah.

Other revisions would include clarifying how tax holidays work.

“Things like this will be defined more clearly so that investors can have certainty over the incentives they can get,” she said.

S&P cautions on worsening balance sheets at Indonesian state firms

By Reuters

Standard & Poor’s Global Ratings last month highlighted deterioration in the balance sheets at Indonesian state-owned enterprises (SOEs) involved in a government-led infrastructure push in Southeast Asia’s biggest economy.

SOEs, especially those working in power and construction, have extensively borrowed in order to match the government development plans, causing their balance sheets to become “substantially weakened,” Xavier Jean, an analyst with S&P, told reporters.

The leveraging level of 20 listed and rated SOEs has increased to around an average of 5 times debt-to-EBITDA, jumping from 1 times in 2011.

“This is a trend that we are keeping a close eye on because we think it’s going to persist, and going to accentuate in 2018 and to the run-up to the 2019 election,” Jean said.

Infrastructure development is a core part of President Joko Widodo’s economic agenda and is aimed at slashing high logistics costs, which are often blamed for creating bottlenecks in the economy.

S&P upgraded Indonesia’s sovereign rating to investment grade in May, years after Fitch and Moody’s, on the back of structural improvements and reduced risks to the country’s fiscal position.

The government estimates a total of $450 billion in infrastructure investment is needed between 2014 to 2019, which can only be partially funded by the government.

Taking up most of the projects, SOEs had to borrow to fill the working capital needs, such as for salaries, while projects are often delayed or take times to generate revenue, Jean said.

Meanwhile, the government’s push to develop infrastructure in less populated areas also raised concerns over future income, he added.

“It is not very clear to us today if a lot of the investments that are made by these companies outside of Java, outside of the heavily populated centres, will be profitable projects or not,” Jean said.

If companies continue to raise investments at the current pace, they could be forced to stop all investment in five years to control their finances, renegotiate their debt or ask for recapitalization by the government, Jean adds.

The debt that these companies take would also affect ratings of Indonesia’s sovereign debt and the banking system from which they borrow, said Kim Eng Tan, S&P’s senior director for sovereign ratings, although he adds that at this point it would not negatively affect government finance.

Last month, the government was forced to suspend and conduct a safety assessment on all elevated infrastructure construction after a string of accidents, which raised questions about the safety of a government drive to upgrade its infrastructure.