Indonesia has released the second of three deregulation/stimulus packages designed to boost a flagging economy and strengthen the exchange rate. The first (released September 10) was primarily an exercise in reducing red tape and regulatory confusion in the trade arena and did not garner a lot of attention and praise, perhaps because its hard to immediately see benefits when you are looking in the regulatory weeds. Darmin Nasution, the Coordinating Economic Affairs Minister admitted, “We issued too many deregulations in the first package and it made us seem to lose focus. Our explanation turned into numbers and people did not get the substance”.
However, the package announced Wednesday is more focused and could perk up the ears of investors who –as a whole– have been moving assets out of Indonesia’s capital markets. “We are making (investing in Indonesia) as attractive as possible,” said Chief Economics Minister Darmin Nasution, announcing the latest measures along with several other ministers. “We must fix, simplify, make it cheaper.”
Here is what you should know about “Installment 2”:
- Permit processing times slashed– New measures announced Tuesday included slashing the time taken to process investment permits from at least 8 days to just 3 hours, with processing for permits in mining and geothermal projects in forested areas to be cut from up to 4 years to about 15 days. The 3-hour time frame, however, is for investments over $6.8 million located in designated industrial parks employing over 1,000 people. Although when announced the facility was to be available immediately, officials have backtracked and say it will be launched in mid-October. The number of permits needed for mining exploration and for establishing a business in an industrial economic zone have been cut.
- Tax Reductions– Exporters who deposit foreign exchange revenue in Indonesia or convert it to rupiah will have withholding taxes from the current rate of 20% to 0% depending on maturity. The interest earnings of a one-month dollar-denominated deposit account would now incur a 10 percent income tax; six-month deposits would incur 2.5 percent and for deposit accounts over six months there would be no income tax. The government will remove value-added taxes for ships, planes and trains made in Indonesia. The VAT is also removed for imported aircraft and spare parts.
- Certificates of Deposit– Indonesia’s central bank, Bank Indonesia, will reissue three month certificates of deposit and two week repo agreements. “We want to drive [liquidity] from short-term instruments towards longer-term instruments because we’re afraid excessive [liquidity] in short-term will create speculation. So we reopen these instruments,” said Mirza Adityaswara, BI’s senior deputy governor.
- Intervention- Bank Indonesia signaled it will intervene in forward markets for rupiah where it is currently valued above 16,000 to the dollar. The rate as of September 30 was 14,717.
- Import bans on cloves and tires were eliminated. The new trade minister, Thomas Lembong, said “The regulation on tire imports was wrongly targeted as it was aimed at protecting the local wheel industry, while our local tire industry is already world-class as Indonesia is a net exporter.
We will need to see the implementing regulations before a final judgement can be rendered on these policies. But they are a welcome sign of the Jokowi’s government intention to make reforms and other changes. It will be interesting to see what will be covered in the next package. There are rumors that Indonesia may bring down corporate tax rates from the current 25% to a level more in line with its ASEAN neighbors or lower. Also, the government may alter the Negative Investment List to allow for more foreign equity. However, other, more wide-reaching reforms to open the economy, change restrictive labor laws, or back away from the mandated value-added (local content requirements) nature of many laws and policies are not yet being talked about. In the end, these deregulation packages may end up being characterized as more minor than major, and Indonesia needs to be performing in the major key. But combined with an earnest approach to building infrastructure– and getting the allocated budget into the system–the packages should push growth back towards 5% or above.