Investing in Indonesia: Perspectives from Regulators and Business Boston University Asian Alumni Festival Thomas Trikasih Lembong Chairman of Indonesia Investment Coordinating Board (BKPM) Jakarta, 3 November 2018
2 What they Say About Indonesia during IMF-World Bank Annual Meeting 2018 Indonesia is a clear example on how a country can grapple with difficult economic circumstances and do that with success Christine Lagarde Managing Director IMF Today, as the fourth most populous country in the world - and now a middle-income country - Indonesia has enjoyed strong economic growth and is making significant advancements with poverty eradication efforts. By working with the government on resilience, disaster recovery and preparedness we aim to help ensure that Indonesia continues its upward economic path. Rodrigo A. Chaves World Bank Country Director for Indonesia It's important to realize that the gradual tightening of monetary policy in the US, the approach of more tightening in the Euro area, and the general tightening of financial conditions facing emerging markets throughout the world is a common factor that a number of countries are contending with. Even though the rupiah this year has depreciated against the dollar by something like 10 percent, its depreciation on a weighted effective basis against its trade partners is only 4 percent _And, the Indonesian growth story has been that of real success. Maurice Obstfeld IMF Chief Economist We would continue to invest not only on e-commerce, but also cloud computing, logistics and...infrastructure in Indonesia, while also helping local businesses to grow. Jack Ma Co-Founder and Executive Chairman of Alibaba Group
Indonesia remains attractive for Business Indonesia s economy is forecast to be the world s 10th largest by 2025 $1 trillion GDP of more GDP (PPP) than $1 trillion The largest economy in ASEAN Only ASEAN Member in the G20 Indonesia is the fourth most populous country in the world Population of 260 million 2x Consuming class twice the size of the population of Australia 44% Young and dynamic people 44% of Indonesians are aged under 25 Indonesia is a global leader in social media. It has: More Facebook and Twitter users than the population of Australia The world s third largest market for Facebook The most active city for Twitter in the world: Jakarta Source: various sources, 2018 3
4 Indonesia aims to be the center of digital economy in SE Asia in 2020 E-Commerce Potential of Transaction in Indonesia: 2013 2016 US$8bn US$20bn Players 2020 US$130bn Financial Technology (Fintech) US$14.5bn US$56.98 Players Transaction in Indonesia 2016 (projection) Nominal of transaction per population 2014 On Demand Services Internet of Things (IOT) 112.6mn 92.0mn Players Internet users in 2017 Mobile social users in 2017 Market opportunity in Asia Pacific 2015 2020 US$250bn US$583bn Players Source: Ministry of Communication and Informatics RI, Tech in Asia, IDC, Daily Social, Bank Indonesia, Statista, Idea, World Bank
5 Int l tourists arrival grew at +22%, investment in tourism up +47% Int l Tourist Arrival +22% 11.5m 14.0m Indonesia Investment realization* in Tourism +47% IDR15 T IDR22 T Annual investment growth in tourism in SE Asia surpasses Asia, 2016-2026 (estimation) Source: WTTC, 2016 2016 2017 2016 2017 10 New Bali Main cities in Indonesia Source: Ministry of Tourism & BKPM, 2018
6 Indonesia Economic Challenges and Issues in 2018 to Tackle Inflation 2018: 3.5 ± 1 % Stable Inflation Rates: Improved infrastructure and logistics that can lower distribution costs Better policy coordination to stabilize food prices. Risks of inflationary pressures : Energy subsidy improvement plans: LPG disbursement is targeted, revocation of electricity subsidies for 450 and 900 VA. Rupiah depreciation due to monetary policy normalization in developed countries Increase of economic activities domestically due to a more adaptive monetary policy (lower interest rates), which is expected to raise the aggregate demand. Exchange Rate 2018: 13,400 Risks of rupiah depreciation : Normalization of the Fed's Monetary Policy: increase in Fed rate (3 x in 2018 and 3-4 x in 2019) and normalization of balance sheet Normalization of EU and Japan Monetary Policy: unwind Quantitative Easing (QE) Increase in domestic activities which will drive import. Risk of rupiah appreciation : Increase in capital inflows to Indonesia 2018 Political Year Literature Review: The impacts of the election year on the economic performance are quite various, such as: Increase in NPISH consumption, Higher government spending, as an incentive to the community, Increase in consumption of nondurable goods, However It is also expected that private investment might be lower due to the political uncertainty Election Year Source: Wrone and de Leon (2014)
7 The Year of 2017: Investment Continues to Grow Beyond the Target.. Investment Realization (IDR Trillion) FDI 16.0% 399.2 DDI 17.8% 545.4 463.1 12.4% 612.8 13.1% 692.8 765.0 DDI 35% (Rp 942T) FDI & DDI Shares, 2013-2017 (in %, IDR) FDI 65% (Rp 1.770T) 2013 2014 2015 2016 2017 2018 (Target) growth +7.9 % Realization in 2017 compared to its target: growth +23.1% 2017 Y-o-y DDI 21.3% Africa 3% America 9% FDI 8.5% 102.1% Total 13.1% *DDI and FDI accumulation, 2018 Europe 11% Australia & Pacific 1% Asia 61% Source: BKPM, 2018
..but investment in Q3 2018 contracts slightly by 1.6% compared to Q3 2017, despite total investment in Jan to Sep 2018 rises by 4.3%. Japan China Korea HK Malaysia US BVI Netherl Australia Others Nominal (IDR tn) 30.6% 17.1% 8.3% 7.5% 6.3% 5.4% 4.6% 3.6% 3.6% 1.6% 11.6% Q1-2018 Q2-2018 Q3-2018 Jan-Sep 2018 Growth (% yoy) Nominal (IDR tn) FDI by country of origin Jan-Sep 2018 Growth (% yoy) USD billion Singapore 6.7 3.8 1.8 1.6 1.4 1.2 1.0 0.8 0.8 0.3 2.5 Nominal (IDR tn) Others, 9.5, 43% Growth (% yoy) FDI by Sectors Jan-Sep 2018 Metal, machinary & electronic, 1.7, 8% Nominal (IDR tn) Housing, Industrial Estate, Office buildings, 3.5, 16% Electricity, Gas & water supply, 3.0, 14% Transp., warehouse & Telco, 2.0, 9% Growth (% yoy) Domestic 76.4 11.0 80.6 32.1 84.7 30.5 241.7 24.1 Foreign 108.9 12.4 95.7-12.9 89.1-20.2 293.7-7.8 Total 185.3 11.8 176.3 3.1 173.8-1.6 535.4 4.3 Mining, 2.2, 10% Investment Realization in the first three quarter of 2018 reached IDR 535.4 trillion or grew at 4.3% yoy DDI is still growing quite well, which is 24.1% FDI realization growth contracted by 7.8% Factors of exchange rate instability, negative trade balance in January to September 2018 and the domestic political climate ahead of the general elections made investors take await and see attitude. Factors of global instability such as the trade war between America and China also helped global investors tend to hold their investments. Asian countries are still the biggest contributor to FDI in Indonesia, contributes 79% of total FDI. One third of FDI realization comes from Singapore. Source: BKPM, 2018 8
Direct Investment challenges still remains, more improvements in the near future to come 9 1 2 Regulation 3 Lots of overlapping regulation (both regional and interministries regulation) Tax & Incentive Different tax rate in different tax office, retrospective law. Land Acquisition Land acquisition is difficult because it involves customary land and ulayat / custom right 4 Skilled Labor & Foreign Worker Acceleration of quality and quantity improvement of skilled labor 5 Public Infrastructure Limited facilities and infrastructure such as roads, ports, electricity, telecommunications, clean water, health facility, education, etc
Structural Reforms to Support Economic Fundamental Economic policy packages to create conducive investment climate and resolve supply side issues FDI relaxation to encourage more investment to boost productivity and create jobs Infrastructure acceleration to improve connectivity and unleash economic potential across nation Tax Incentive for several sectors to advance the sectors and tax incentive for several zones to reduce disparities among regions and bolster regional economic growth Launching of Online Single Submission to simplified investment Investing in Human Capital and Facilitating More and More Vocational Training
Doing Business Reform: One Institution to Publish Licensing 11
12 The new Negative Investment List is on its way Where we are now Input from Ministries/Government Agencies Input from Stakeholders: Foreign Embassies Foreign Chambers Business Association etc. International Business/Economic Development Implementation of Investment Negative List BKPM and Ministries / Government Agencies Plenary meeting Coordinating Ministry of Economic Affairs/Maritime Affairs, BKPM and other Ministries/Government Agencies President Presidential Regulation Issued Mechanism to Review Investment Negative List Source: BKPM, 2017 Pending Issue
Indonesia Investment Promotion Centre (IIPC) Badan Koordinasi Penanaman Modal (BKPM) Indonesia Investment Coordinating Board Jalan Jenderal Gatot Subroto No. 44 Jakarta 12190 - Indonesia t +62 21 525 2008 f +62 21 525 4945 e info@bkpm.go.id bkpm.go.id investindonesia.go.id 13