AP_COM_Manu_1

This article was first published in the July/August 2016 China edition of Accounting and Business magazine.

When President Joko Widodo (Jokowi) took office in October 2014 expectations were high that reforms would set Indonesia on a more vibrant growth path. With its 250 million people, abundant natural resources, open capital markets and a decent manufacturing base, Indonesia offers great promise. But poor governance, a difficult business environment and a recent tendency to protectionist policies have led to disappointing growth.

It seems however that things are changing. First, the government has shifted its stance towards a more open economy. The pace of reform picked up after Jokowi reshuffled his cabinet in August last year, bringing in new blood. The latest Negative Investment List (which details business types closed to foreign investment) is more positive than expected, with the intention of increasing investor interest in sectors such as cold storage, films and pharmaceuticals. 

Since August, the government has introduced 12 economic packages, with the emphasis on deregulation. By the end of April, 193 of the 203 new regulations had been implemented, with a promise that the rest will be settled by the end of May. 

This progress reflects a fundamental shift in philosophy. President Jokowi and his advisers have noted the strides Vietnam has been making since it opened up its economy, attracting considerable relocated manufacturing production from China where costs have risen greatly. Indonesia has barely seen any, missing out on a rare opportunity to accelerate growth. 

Another factor influencing policymakers is the Trans-Pacific Partnership (TPP), a free trade agreement among 12 nations in the Pacific region which accounts for 40% of world economic output. Unlike competitors for foreign investment such as Vietnam and Malaysia, Indonesia declined to participate in the TPP. The cabinet is assessing how Indonesia might now participate in the TPP. 

President Jokowi’s growing political clout also helps. He has recently secured the support of Golkar, the second largest political party in parliament, which gives him the capability and confidence to push through reforms. 

As a result, more radical reforms are in the pipeline. Jokowi appreciates the need to improve Indonesia’s difficult business environment, infamous for corruption and for conflicting and poorly drafted regulations issued by multiple jurisdictions, which delay projects for years. Jokowi is personally pushing hard to radically improve Indonesia’s ranking in the World Bank’s ‘ease of doing business’ index. 

Reforms to labour laws are also on the cards. Despite the availability of low-cost labour and a huge consumer market, foreign investors have been deterred from investing in Indonesia’s manufacturing sector by measures such as massive redundancy payments even for poorly performing workers.  

If the President can pull these reforms off, he would transform Indonesia’s growth potential, attracting flows of foreign direct investment which would boost growth within a couple of years to more than 7%. Unlike the high growth rates Indonesia enjoyed between 2007 and 2014 which were powered by an unsustainable rise in commodity prices, this new growth phase would be more broad-based. 

In the near term, the economy remains sluggish. But with weather conditions improving, cuts in interest rates, and the effects of low commodity prices and reduced subsidies receding, the short-term challenges are likely to be contained. If the planned reforms are implemented, Indonesia is likely to enjoy much higher growth rates from 2018 onwards.

Manu Bhaskaran is CEO of Centennial Asia Advisors in Singapore