Indonesia is a resource-rich country with a dynamic and growing middle class and a relatively young population. This favourable demographic profile making it attractive for long-term investors. On a nominal basis, Indonesia’s gross domestic product is more than USD 1 trillion.
Prior to COVID-19, the Indonesian economy was growing at a promising rate of 5%, driven substantially by household consumption. Before, during, and most likely after the COVID-19 pandemic ends, the administration of Indonesian President Joko Widodo has and will stress infrastructure development, which supports foreign investment in the country. The administration acknowledges the essential need to efficiently utilize the country’s natural resources, generate new investment and continue to develop the economy.
Notwithstanding the obstacles thrown up by the ongoing COVID-19 pandemic, 2020 was significant in a positive way in that the Indonesian government finally enacted the omnibus jobs creation law, a massive legal reform of various business sectors aimed at simplifying licensing and the investment process, encouraging foreign investment and creating job opportunities for Indonesians. Another positive development in 2020 has been the continuing growth of the digital economy, tech startups and small to medium enterprises, with the Government updating and strengthening the legal framework for these sectors to support continued investment growth.
The COVID-19 pandemic has had a significant impact on Indonesia’s population of more than 265 million, concentrated on the island of Java and the capital city, Jakarta. The challenge for the Government has been to restrict mobility to curb the spread of the coronavirus, while at the same time protecting and encouraging investment flows. As the number of COVID-19 cases rose across Indonesia, concentrated in the capital, the Indonesian Government implemented so-called large-scale social restrictions beginning in April 2020. These restrictions have been loosened and re-tightened as the number of cases has fluctuated.
Mandatory health protocols such as use of face masks, temperature checks, and capacity limits on shops, restaurants and other public spaces were enforced by the Government to curb COVID-19 case surges. As a counterbalance to restrictive health protocols, the Government waived capacity limitations on essential industries such as communication and information technology, construction, energy, finance, food and beverage, health, hospitality, logistics, basic services, strategic industries, and public utilities and industries designated as vital objects, national and specific objects, and/or daily necessities.
The Government, at both the central and regional levels, enacted policy measures to incentivize productivity and business growth, notably by reducing the corporate income tax, bearing the cost of employee income tax for a certain period, and imposing new measures on e-commerce taxes for domestic and offshore e-commerce business actors. The Government has also allocated a national economic recovery budget amounting to USD 43 billion to be utilized for, among other things, strengthening the social safety net, capital injections into state-owned entities and providing interest rate subsidies for micro, small and medium enterprises. This presents a good opportunity for investors to utilize these incentives and increase productivity, which is what the Government is hoping for to expedite economic recovery post-COVID-19.
On October 5, 2020, the Indonesian House of Representatives passed the omnibus jobs creation bill, and on November 2, 2020, President Joko Widodo signed the bill into law. Law No. 11 of 2020 on Jobs Creation, more commonly referred to as the Omnibus Law, is an overarching law that amends more than 1,244 articles in 79 existing laws in various fields, most notably employment, business licensing and investment, the empowerment and protection of micro, small and medium enterprises, trade, land and real estate, the environment, electricity, mining, telecommunications, and many others.
The Government of Indonesia envisages the Omnibus Law facilitating investment growth by simplifying business licensing to improve the ease of doing business. Another key point introduced by the Omnibus Law is an investment priority list that will include prioritised business sectors, fiscal incentives and non-fiscal incentives for different business sectors, business sectors reserved for micro, small and medium enterprises, and sectors that are open for investment under certain conditions. The details are to be fleshed out in a presidential regulation. This investment priority list is no doubt an important development and one that investors should closely monitor as we await the issuance of the new presidential regulation and other implementing regulations for the Omnibus Law. All these implementing regulations are supposed to be issued within three months after the enactment of the Omnibus Law, but whether that timeline holds remains to be seen.
Aside from the legal challenges and changes, the COVID-19 outbreak has forced most of us to adapt to new ways of working and doing business. We are attending online meetings instead of physical ones, webinars have replaced seminars, and we are e-filing whatever documents we can. As more of us and our work move into the virtual world, technology such as electronic documents, digital signatures, electronic payments, video-conferencing facilities and online collaboration platforms have become an even more crucial priority for companies in running their day-to-day operations. And with the global pandemic yet to end, investors and companies will have to be acutely aware of their cashflow and liquidity, maintain positive relationships with vendors, partners and suppliers, and ensure required governmental compliances, while slowly increasing productivity by taking advantage of the incentives the Government is providing to business actors dealing with the pandemic and moving forward into the post-COVID-19 era.