Successfully investing in Indonesia

The Indonesian economy has developed dynamically over the last ten years with annual growth rates of around 6 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 has stabilized further in 2022. Particularly labour-intensive industries, such as the tourism sector and the textile industry, were severely af­fec­ted by the pandemic but are since recovering. The economic slump was rather moderate by regional standards, as other ASEAN countries are more closely integrated into international supply chains than Indonesia.

Some problems persist for the economy, particularly in the form of cumbersome and non-transparent bu­reau­cra­cy, underdeveloped infrastructure in large parts of the country, and a serious shortage of skilled workers for some industries. However, at the end of 2020, the government introduced numerous facilitations for investors via an omnibus law providing substantial changes in the areas of tax, labour and investment law, among others. The government was ordered by the Constitutional Court to revise this law, but the basic facilitation of in­vest­ment has not changed. These adjustments are expected in the second half of 2023.

In view of the positive economic development and growth forecasts to date, Indonesia has increasingly come to the attention of foreign investors in recent years. The resource-rich country has a large domestic market and a growing demand for technology. Important target sectors for medium-sized foreign direct investments in Indo­nesia are infrastructure and, particularly, mechanical engineering, metalworking and electrical engineering.

Indonesian investment promotion programs are comparable to those in other countries. There are tax reduc­tions, tax exemptions for certain "pioneer industries", extended loss carry-forwards of up to ten years and the possibility of duty-free imports of machinery, goods or production materials for certain industries and service sectors. The criteria are also similar to other countries: Investment in remote provinces, a high number of wor­kers, technology transfer, benefits to the Indonesian economy or society, and export orientation. The programs have been further expanded for some industries since 2020 in the context of the Covid-19 crisis.

There are deficits in Indonesia in 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. The Indonesian legal system often appears non-transparent and not very lucid to German entrepreneurs. This is counteracted by the aforementioned omnibus law, which makes the regulatory environment in the coun­try appear more transparent and comprehensible. 

Restrictions on foreign investment arise for some sectors as a result of regulatory requirements restricting cer­tain business areas for foreigners in order to protect the national interest and the domestic economy, stipu­lating a significant minimum capitalization especially for SMEs. Challenges have also arisen in business prac­tice as a result of the extremely restrictive labour 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, some of which have not yet been finalized, will play out in practice, but a simplification is generally expected.

Despite the trend towards more equal treatment of foreign and domestic investments, there are still restrictions for foreigners in several economic sectors. However, the implementing regulations to the omnibus law issued in February 2021 have eased market access in additional business sectors.

Certain business sectors can also be restricted by special laws. In the past, many foreign investors have also complained about the long duration of administrative procedures to obtain the licenses required for the op­er­ating business of a newly established company. This problem was addressed by the government in late 2018: Required registration and licensing procedures can now be carried out 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 some cases. This is average by regional standards. 

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. The 10th round of negotiations for the Com­prehensive Economic Partnership Agreement (CEPA) was held via video conference in late February 2021.

On 2 February 2021, Indonesia's President Joko Widodo issued Presidential Regulation No. 10 of 2021 on In­vest­ment Business Fields ("Regulation No. 10/2021"), which took effect 30 days later, on 4 March 2021. The Ex­ec­utive Order refers to the Job Creation Act, commonly known as the "Omnibus Law," which became effective on 2 November 2020. Unlike the previous approach of listing business fields closed to foreign investment, Decree No. 10/2021 provides, in a positive list approach, that all business fields are now open to foreign investment unless,

Interesting changes in Regulation No. 10/2021 occur in the areas of distribution services, which were previously only allowed for foreign investment within a narrow framework. Now, wholesale distribution without any link to production is fully open to foreign investment. Retail services and commission business are now also more open to foreign investment.

Protectionism remains in some fields; with some sectors being particularly reserved for local cooperatives or micro/SMEs. It remains to be seen to what extent there will also be a procedural simplification for the regis­tration and licensing of foreign investments; so far, there is a lack of sufficient experience with the new admin­istrative practice.

During the first term of office of President Joko Widodo, Indonesia appeared relatively stable both democratic­ally and economically, and was able to develop positively as an investment location. This stability has been main­tained in recent years, and the economic framework has been further liberalized. However, the president's policies (due to pressure from within the party) also reveal protectionist elements. For example, the local pro­duction of industrial products is to be strengthened, and primarily large foreign investments are to be approved in Indonesia - for this purpose, a minimum capitalization of 10 billion Indonesian rupiah is generally planned. In 2024, new elections will be held, with President Joko Widodo no longer being eligible for election after two terms in office. In principle, the three current potential successors are not expected to turn away from the – slow – opening. Traditionally, major state projects are not being pushed forward in the last 12 to 18 months before a new election.