Successfully investing in Indonesia

The Indonesian economy has developed dynamically over the last twenty years with annual growth rates of around 5 percent. In 2020, however, there was a negative GDP growth of around 2 percent for the first time due to the Covid-19 crisis. Since 2021, however, GDP grew slowly again by 3.7 percent and reached in 2022 the long-term growth path of around 5 percent. 

  

In the beginning of 2021, the Indonesian government introduced numerous facilitations for (foreign) investors through the implementation of a so-called "omnibus law" providing for substantial changes in the areas of investment, tax, and employment laws aiming at opening more than 100 business sectors for foreign direct investment and simplifying the administrative (approval) procedures. As it currently stands, the administrative proceedings in connection with the implementation of the "omnibus law" are in the process of being implemented and updated; specific business projects, however, still require an intensive dialogue with the Indonesian authorities. 

  

Some problems persist for the economy, particularly in the form of the (still) cumbersome and non-transparent bureaucracy, underdeveloped infrastructure in large parts of the country, and a serious shortage of skilled employees (specifically of those with international expertise and solid language skills) for some business sectors. 

  

Despite all these challenges, Indonesia scores with its huge internal market (being the largest economy in Southeast Asia), its young and tech-savvy population (standing at approx. 276 Million in the year 2023), and its richness in natural resources. 

In view of the positive economic development, its huge domestic market, and growth forecasts to date, Indonesia is now attracting more attention of foreign investors. Considering current trends of "de-coupling" and "de-risking" from the Chinese market, it remains, however, to be seen, which role Indonesia can play as an alternative or complementary investment location to China. Questions regarding a better integration into the regional/ global supply chains as well as the inadequateness of the infrastructure for a sustainable growth (specifically outside of Jakarta) remain. 

  

From a tax perspective, Indonesian investment promotion programs are comparable to those in other countries in Southeast Asia. Indonesian tax law provides for tax reductions (tax holidays) to the benefit of certain "pioneer industries". Tax allowances are applicable to businesses or investments in certain remote regions including the provision of extended loss carry-forward schemes for up to ten years. The Investment Master List facilitates the duty-free imports of machinery and raw materials. The relevant criteria to benefit from preceding incentives are also similar to those other countries in Southeast Asia are offering. They aim at investment projects in remote regions providing opportunities for a high number of local workers, the provision of technology transfer, and benefiting the Indonesian economy or society as well as Indonesia's export orientation. 

  

Investors are actively looking into the infrastructure sector (one of the priorities of President Joko Widodo), the energy sector (with a specific focus on renewable energy), the solid automotive sector (including electronic vehicles and the production of batteries), as well as the tourism and hospitality sector (after the end of the Covid pandemic). In addition, the healthcare and pharmaceutical sector attracts attention due to the increasing demand from Indonesia's growing middle-class. Lastly, the processing of raw materials onshore is one of the main priorities of the Indonesian government. 

Unfortunately, there are still deficits in Indonesia's infrastructure, especially in electricity generation and transport (roads, railways, sea, and airports). Depending on the location, this can lead to challenges, especially for production facilities. In principle, Indonesia is currently not adequately integrated in global/​​regional supply chains. 

  

The Indonesian legal system often appears non-transparent and not very lucid to German entrepreneurs. The aforementioned "omnibus law" facilitates, however, better access to Indonesian authorities and streamlined the framework for foreign direct investment, which is an improvement to the previous set of investment laws and regulations. As an example, the required registration and licensing procedures can now be conducted digitally via the OSS (Online Single Submission) portal, which has since noticeably reduced processing times. Companies can now be established in less than one month in certain cases. This is average by regional standards, but a significant improvement. 

  

Restrictions on foreign investment arise for some sectors because of regulatory requirements restricting certain business areas for foreigners to protect the national interest and the domestic economy, stipulating a significant minimum capitalization. Challenges have also arisen in business practice as a result of the restrictive employment laws that have been in place to date. It remains to be seen how the amended regulations, particularly in investment law and their implementing provisions in conjunction with the administrative proceedings will play out in practice. A certain level of simplification is already noticeable.

  

Although there is a constant influx of university graduates to the Indonesian labour market every year, the talent pool relevant for foreign investors is limited. Most graduates have not lived or studied abroad which means that the proficiency level of English as well as the international experience varies among this group. In general, foreign investors need to expect allocating substantial resources and time for the training and development of their respective workforce. 

  

In recent years, Indonesia has expanded its import barriers and non-tariff trade barriers in some areas. The launch of negotiations for a free trade agreement between the EU and Indonesia that, among other things, seeks to mitigate trade barriers, was announced on 18 July 2016. In September 2022, the European Commission and Indonesia agreed to accelerate negotiations on this FTA aiming at conclusion by mid-2024. This timeline is obviously ambitious as certain disputes between the EU and Indonesia in connection with the palm oil industry, which is one of the important agricultural sectors in Indonesia, as well as Indonesia's ban and domestic processing requirement of nickel are not solved, yet.

On 14 February 2024, the Indonesian people elected Indonesia's next President. Mr. Prabowo Subianto achieved a solid majority of 58.6 percent of the votes cast and will assume office in October 2024. The exact composition of the new administration is not clear, yet. In addition, the majority situation in the Indonesian House of Representative is also unclear, as eight political parties are entitled to send their respective elected candidates to the House of Representative. It is widely expected that the major political players in Indonesia will be occupied brokering out new alliances and majorities during the next couple of months. Nevertheless, president-elect Prabowo's mandate is considered to be solid also due the (implicit) support of current President Joko Widodo. 

   

The (international) business community expects that the change of administration will not significantly change the overall (legal) environment for foreign direct investment in Indonesia. Economic growth, a better welfare system, and investments in the infrastructure sector should continue to have priority. The defence sector may gain more attention from the new administration given the background of president-elect Prabowo Subianto as current Minister of Defence and his long military career. Lastly, the agricultural sector should also benefit from new governmental initiatives to strengthen Indonesia's food security.

In my view, Indonesia will continue to maintain a stable and sustainable growth. The policies implemented by the administration of President Joko Widodo will probably not materially be changed by the new administration of president-elect Prabowo Subianto. That means that Indonesia will continue to open its economy for foreign direct investment, but at its own pace and with certain protectionist elements in place. I do not believe that the minimum investment/ minimum capitalization requirement of (at least) 10 billion IDR  (i.e., approx. 580,000 euro) will be lowered in the foreseeable future as the Indonesian government does not show any intention to allow small (foreign) enterprises to enter the Indonesian market. 

  

It remains to be seen to what extent and at which pace the new administration will tackle certain areas, which may be perceived as roadblocks to an higher growth potential. In my view, the further education of the workforce should be a priority to reduce the existing shortage of skilled labour. In addition, the existing discrepancies between Jakarta (Java) and the other regions in terms of quality of infrastructure, income equality, and opportunities for the young population need to be adequately addressed. 

  

Indonesia remains to be an interesting market for every investor who is committed to long-term investments. In my view, it is now the perfect time to explore the potential of the Indonesian market as Indonesia's overall outlook for the next decade is promising. ​