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Indonesia Looks to Foreign Investment to Boost Economy

By Dezan Shira & Associates
Posted: 27th January 2015 09:16
As Indonesia looks for ways to attract more foreign investment and boost its economy, it has prepared for a busy year of investor-friendly reforms. It is set to introduce a one-stop service for providing ministry licenses, speed up the completion of government tenders by March each year, establish a land bank to fast track infrastructure projects and release a five-year $450 billion infrastructure investment plan. According to the Asian Development Bank (ADB), Indonesia requires US$500 billion in the next five years to develop its infrastructure.
Indonesian President Joko Widodo has stressed Indonesia’s need for foreign investment. In December 2014, he told the Wall Street Journal, “Our national budget is very limited, so we need investment, we need investors, to boost our economic growth, to build our deep seaports, to build our airports.”
Aided by the plummeting oil price, Mr. Widodo has kept his pre-election promise of removing distorting fuel subsidies. Gasoline prices at the pump in Indonesia fell from Rp 8,500 (US$0.67) per liter in December 2014 to Rp 6,600 (US$0.52) on January 12, 2015. Sixty-one percent of the US$18 billion of savings from removed subsidies will be spent on crucial infrastructure projects. Altogether, capital expenditures make up 20 percent of central government spending in the government’s revised 2015 budget proposals.
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Licensing Reform
Indonesia is overhauling its system of of issuing business licenses. Under the system Widido inherited, businesses had to wait as long as a year to obtain permits. Under the new system, licenses are intended to be granted within weeks. Widodo has been taking a personal interest in speeding up licensing procedures, reportedly turning up unannounced at government departments to ensure licensing procedures are sped up.
On January 15, 2015 the Investment and Coordinating Board (BKPM) piloted the one-stop licensing service in Indonesia’s 15 major provinces with 135 major license types in power, infrastructure, and agriculture sectors being prepared. According to the chief of the BKPM, Indonesia plans on receiving US$75.33 billion in investment by 2019.
The new administration’s steps to improve the business climate have increased confidence in investors and lenders. First, on January 8, Moody’s evaluated the subsidy measures as “credit positive” and argued that they will boost the private sector’s confidence in Indonesia’s business environment. Second, optimism in the infrastructure space has led to the ADB approval of US$1.5 billion in loans to Indonesia in 2015, almost double the amount approved a year before. Finally, the respondents of the American Chamber of Commerce’s 2015 ASEAN Business Outlook Survey cited Indonesia as the top destination for expansion plans.
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Although Indonesia has a full calendar of business friendly reforms in 2015, bureaucratic and political challenges remain. The parliament has to pass the revised 2015 budget proposals, and the government lacks a simple majority. Land acquisition has been a major problem for large investors. For instance, last year a consortium of Japanese and Indonesian companies reportedly walked away from a US$4 billion Central Java power plant project because of delays in land acquisition.
Compared to its ASEAN neighbors, Indonesia has much work to do if it wants to see foreign investment into the country continue to increase. The World Bank’s 2015 Doing Business Report ranks the country at 114 compared to Singapore at 1 and Malaysia at 18. However, if Indonesia is able to keep on track with its reforms, the country is set to climb through the rankings.
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Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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