A push to Indonesia’s infrastructure investment-
Indonesia’s economic growth plummeted in the first quarter of 2015-16 to 4.7 per cent from 5 per cent (year on year) in the same period last year. This was the worst performance since the global financial crisis in 2009. Apart from investment, most indicators – that is, private consumption, government expenditure and net exports – performed poorly. Furthermore, the trade balance remains very weak because of weak demand and low commodity prices. Indonesia’s major trading partners, in particular China and the US, grew very slowly. The annual inflation rate of almost 7 per cent in August 2015 was higher than almost all Indonesia’s neighbours and trading partners, thus undermining the potential competitive gains from the rupiah’s 12-month depreciation.
Despite flagging economic parameters, investment in Indonesia still grew at 4.4 per cent, a bit higher than that in the previous quarter (4.3 per cent) fuelled by investments in non-construction activity. Investor diffidence towards the construction sector continued due to uncertainty over offtake of government projects.
Therefore, to create a conducive macroeconomic environment, the government (in co-ordination with the central bank, Bank Indonesia, and the Financial Services Authority) has promulgated nine economic stimulus packages since September 2015.
Fiscal stimulus packages
The first phase of this package encompasses three policies. The first one is to boost the ease of doing business in Indonesia through deregulation, curtailing red tape (bureaucracy), simplifying the process for companies to obtain business permits, enhancing law enforcement and increasing business certainty.
The second policy involves hastening the implementation of strategic projects of national interest through the elimination of bureaucratic bottlenecks and land acquisition problems to ensure quick completion. The government will also accelerate and increase the flow of central government funds to local governments to achieve the goals mentioned above. However, not much has been made public in terms of clear details, leaving the government with room to manoeuvre later in deciding how to actualise the land acquisition process. The third policy involves raising investment in Indonesia’s property sector.
Unlike the first set of reforms, which were seen to have little impact on pressing economic challenges, the second economic policy package has been largely well received. The package provides for hastening the process of obtaining industrial park investment permits from a few days to a matter of hours, and interest rate tax cuts for exporters.
Further, in a bid to prod Indonesia’s manufacturing industry, the government has exempted value added tax (VAT) and sales tax on imported intermediary goods for the logistics sector and scrapped VAT for imports of aircraft components and aviation safety equipment. The package also unveiled the government’s plans to develop bonded logistics zones in Cikarang, West Java, and Merak, Banten.
The third stimulus package lays emphasis on lowering the prices of fuel and gas, and ratchet down tariff on electricity in order to enhance operational efficiency by reducing production and transportation costs, and avoid distressed companies from going bankrupt.
The government, through its fourth economic package, aims to provide soft micro loans to at least 30 small and medium, export-oriented and labour-intensive businesses at competitive interest rates, which may have an impact on construction activity. Further, the government has provided a fixed formula to determine wages to provide more certainty to business owners regarding minimum wage growth, following which wages would be adjusted every year, based on the provincial inflation rate and economic growth pace.
The fifth economic policy package provides tax incentives for asset revaluation, and scrapping double taxation on real estate investment trusts. The government has reduced the tax on fixed asset growth from the existing 10 per cent to 3 per cent, provided companies submit proposals for asset revaluation by end-2016. The measure will incentivise firms to revalue their assets. The measure regarding scrapping of double taxation on real estate investment trusts relates specifically to investment products and the Indonesian capital market; therefore, its scope is still relatively limited given that the capitalisation of the Indonesian stock exchange is small. The tax facility may encourage the development of infrastructure and real estate projects as well as support the growth of construction services in Indonesia.
The sixth stimulus package involves tax incentives for investment in Indonesia’s special economic zones (SEZs). Investors can get income tax discounts ranging from 20 to 100 per cent for up to 25 years.
While the seventh package pertained to worker/labour incentives, the eighth package encapsulated three policies. First, import taxes on 21 categories of airplane spare parts were scrapped. Second, fiscal and non-fiscal incentives were provided for the development of oil refineries, and opening up of this sector to private participation. Earlier, construction of oil refineries was limited to state-owned energy firm Pertamina or through partnership between Pertamina and private companies. Third, the central government streamlined and harmonised land acquisition for infrastructure development through the new “one-map policy” to prevent overlapping land use across the country.
The ninth package aims to combat Indonesia’s high logistics costs and expedite power generation projects. The package focused on four facets inlcuding those impacting marine logistics, streamlining efficiency of transportation, and targeted ease of import and export.
The way forward
While it is too early to gauge the effect of these announcements, these are definitely steps in the right direction which will bring about a change in the long-term investment and consumption landscape of the Indonesian economy. With only 11 per cent of the $21 billion allocated for infrastructure in 2015 being spent in the first seven months of 2015, the announcement of the economic stimulus packages comes at an opportune time. Set against a backdrop of downbeat business and consumer sentiment, the series of packages is incremental but progressive and wide ranging. It will take some time for the impact to be visible. The success of these measures would depend on the government’s ability to ensure regulatory certainty and effective coordination amongst authorities to make land acquisition easier and enforce the new legal framework that supports public-private partnerships.
However, the ground is set for growing opportunties, enabling the ease of business and policy framework to attract various stakeholders associated with infrastructure development.
That said, on a positive note, the newly announced measures, if implemented effectively, should help revive Southeast Asia’s largest economy. After the series of economic stimulus packages, the Indonesian government expects the county’s non-oil and gas industrial sector to bounce back to a growth level of around 6 per cent in 2016. New investment projects will start having a positive impact on the country’s industrial growth from 2016.
Against this backdrop, the latest set of economic stimulus measures coupled with higher productive capital spending should provide an impetus to final demand and crowd-in private investments, aiding Indonesia’s growth prospects.
The measures discussed above should help to provide a basis for economic recovery, with tax cuts and allowances becoming major parts of the stimulus. These should help in GDP growth recovery to 5.1 per cent in 2016.
Much remains to be seen as to how the government goes about turning these proposed reforms into reality. Being able to shore up investor confidence through the announcement of plans to curb the bureaucracy is a noteworthy accomplishment, but how far the proposed norms will be effectively implemented will decide whether the positive sentiment generated by the announcement will persist.
