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Can Indonesia's economic opening up boost growth?

In a bid to accelerate growth and draw foreign investment into the country, Indonesia recently announced a major opening of its economy. DW takes a look at the proposed measures and their implications.

Indonesian President Joko Widodo - commonly known as "Jokowi" - said on Wednesday, February 17, that he's still not satisfied with the investment climate in the Southeast Asian nation, stressing that his government would continue to deregulate the traditionally protectionist economy.

Jokowi made the comments in front of business leaders attending an Association of Southeast Asian Nations (ASEAN) Economic Community conference in the US city of San Francisco.

The remarks follow his administration's decision to ease restrictions on foreign investment in nearly 50 different industrial sectors, ranging from retail and health care to e-commerce and the movie industry. Furthermore, foreign investment levels were raised for a number of other sectors, including warehouse distribution, catering, convention services, and exhibitions and travel services.

The government's move came amid slowing growth and declining enthusiasm among foreign companies to funnel investments into the Southeast Asia's largest economy due to what they view as the government's protectionist policies.

Economic woes

And there seem to be plenty of reasons for liberalizing the economy, as Indonesia's economic expansion last year was at its slowest pace since 2009, at 4.8 percent.

The country also took a hit from the current slump in the prices of raw materials, particularly due to the sharp decline in world prices for thermal coal and LNG, both of which are key Indonesian exports - commodities have been a significant contributor to the nation's economy and budget, accounting for around 62 percent of Indonesia's exports in 2014.

Until recently, the nation's economic problems had been compounded by deterioration in the foreign investment climate due to, for instance, increasingly stringent local content requirements for multinational companies.

Moreover, businesses still face considerable regulatory barriers in Indonesia, which ranks 109 out of 189 countries in the World Bank Ease of Doing Business Index for 2016.

Growing pressure

Although there are positive signs of change, with Indonesia having improved its position in the World Bank ranking by 11 places (compared to its ranking in 2015), more regulatory reforms are needed to make the Indonesian business environment more attractive for new investment, say experts.

And accelerating growth is key to President Jokowi, who pledged during his 2014 presidential campaign to reinvigorate Southeast Asia's largest economy.

"The reforms that Jokowi is making to liberalize foreign direct investment (FDI) rules reflect growing concerns in the Indonesian cabinet about the slowdown in momentum, with the Indonesian growth having moderated to a pace of 4.8 percent in 2015, compared with GDP growth rates of over six percent between 2010 and 2012," Rajiv Biswas, chief Asia Pacific economist at analytics firm IHS, told DW.

While GDP growth of 4.8 percent may seem quite high compared to that of most EU countries, it is important to note that Indonesia is still a relatively poor nation which needs to sustain high economic growth rates in order to improve living standards and human development indicators, Biswas added.

In a further effort to boost growth, the nation's central bank, Bank Indonesia, announced on February 18 a cut in its benchmark interest rates as well as in the amount of reserves banks have to hold, in the hope that the move will stimulate bank lending to businesses.

A game changer?

But will the government's move be a game changer and convince global companies to invest in Indonesia? Experts such as Charlie Lay, Emerging Markets analyst at Germany's Commerzbank, say Jokowi has been a "breath of fresh air" for the country since he assumed office in October 2014, both in terms of a willingness to undertake reforms and to promote the country to the outside world.

However, in order to draw foreign investment, the key remains in the "implementation of such well-intentioned measures," he noted.

In this context, Andreas Ufen, a Southeast Asia expert and senior research fellow at the Germany-based GIGA Institute, says Jokowi is likely to face significant challenges given the high level of economic nationalism in the country. "The president has to work with a huge coalition and even within his own party, the PDI-P, protectionist measures have often been supported," the expert told DW.

Sumedh Deorukhkar agrees. The Indonesia economist at BBVA Research told DW he doesn't believe there will be a sudden turnaround in investor sentiment over Indonesia's growth prospects.

Pointing out that removing barriers to investment is just one part of the story, he underlined: "For foreign investments to actually materialize, we need to keep an eye on the government's ability to ensure regulatory certainty, tackle red tape, make rigid labor laws more flexible, ensure effective coordination amongst authorities to make land acquisition easier and enforce the new legal framework that supports public-private partnerships."


In terms of who could profit most from Indonesia's liberalization, experts say it is companies that are able to participate in improving and building the country's infrastructure - such as roads, seaports, airports and medical facilities - which will benefit the most.

Indonesien Autofabrik 2014

Indonesia's economic growth last year, at 4.8 percent, fell to its slowest pace in six years

Two of the key sectors that have been liberalized - healthcare and transport services - offer considerable opportunities to countries such as Germany which boast advanced private sector services firms. "With Indonesian public healthcare standards being very low compared to those in developed countries, the fast-growing Indonesian middle class represent a growing market for private healthcare services," noted IHS analyst Biswas.

In the area of transport and logistics, he added, the liberalization of warehouse distribution and cold storage, as well as port management services and cargo handling, offer significant opportunities to advanced logistics management companies from Germany as well as other EU countries that have leading international logistics providers.

Nonetheless, analyst Lay stresses that foreign companies are likely to adopt an incremental and gradual approach. "It is still early days but the potential is there. And given that Indonesia is a huge market of some 250 million people, there are plenty of opportunities for companies to explore."

Additional reporting by Gabriel Domínguez.