Indonesia sees less foreign investment in first half of 2020

According to Indonesia’s investment authority BKPM, Indonesia raised foreign direct investment (FDI) worth US$13.6 billion in the first half of 2020. This is the weakest half-year figure since 2012 and is around five percent below the figure for the same period last year. However, there is some uncertainty about the information. These figures are partly based on different rupiah conversion rates (corresponding to those in the state budget). In addition, according to insiders, many investments are only recorded with a long delay and often only imprecisely.

In this respect, it is also difficult to estimate what influence the COVID-19 pandemic will have on the numbers. In the second quarter of 2020, which was completely under the influence of severe economic restrictions, FDI inflows remained at the level of the first quarter - domestic direct investment fell by almost 10%.

Even beyond the current economic development, the archipelago is not attracting enough foreign funds. In terms of economic output, Indonesia has less FDI than most other ASEAN countries. The numbers also lag behind political targets. In 2020, BKPM wants to achieve total investments (domestic and foreign) of the equivalent of almost $57 billion (the target has been lowered by around $5 billion due to the COVID-19 pandemic). Only 46% of this was achieved in the first half of the year.

Legal reform stalled 

The reasons for the weakness in attracting foreign investment are well known. Indonesia keeps many economic sectors closed to foreigners or only open to a limited extent in order to protect domestic companies from competition. In addition, there is an excessive bureaucracy with overlapping legislation between central government and provincial authorities. Labor law, which is extremely rigid in regional comparison, is particularly deterrent.

However, there has been some progress since President Joko Widodo took office in 2014. For example, the archipelago has improved on the major business climate indices. In the World Bank's Ease of Doing Business Index there was a jump from 128th place to currently 73rd place. However, there has been stagnation for two years. After taking office in October 2019, BKPM boss Bahlil Lahaldalia announced that he would step down if Indonesia does not make it into the top 50 countries in the Ease of Doing Business Index in the next four years.

The prerequisite for this, however, is the implementation of the so-called "Omnibus Bill" reform package initiated by President Widodo. A legislation of more than 1,000 pages, it comprises almost 80 laws and 1,200 paragraphs and is intended to open up more economic sectors for foreign investments, reduce bureaucratic requirements and grant investors tax incentives. The core element is the reform of labor law, which, however, is facing strong headwinds in the media and from employee representatives. Even during the times of the ban on assembly during the corona pandemic, the unions organized demonstrations in front of the parliament building in Jakarta.

The Omnibus Bill was passed into parliament in February 2020 and ratification was postponed during the pandemic. The media expect the deliberations to end in August or September. It is possible that labor law reform will be excluded for the time being.

China is expanding its influence 

Above all, Indonesia needs investments in the manufacturing industry, the share of economic output of which has been declining for many years. High-value jobs are to be created there. In the first half of 2020, 44.4% of foreign investments flowed into this sector, which is significantly less than in 2019 as a whole (54.4%).

Most of the foreign investment comes from Singapore, which is also used as a stepping stone to Indonesia by Western companies. The second most important country of origin is China, ahead of Hong Kong. Both countries together accounted for almost a third of the inflows - in 2015 it was barely more than five percent. This shows the increasing importance of the People's Republic for the Indonesian economy. In 2019, China ousted Japan from its traditional second place among the FDI countries of origin.

China is by far Indonesia's largest trading partner. From there, Indonesia is hoping for production relocations by companies that have become too dependent on the People's Republic. Most recently, seven new settlements were announced from there, but only one company has actually started building a factory.

In Indonesia, Germany is primarily a technology supplier and less active in the implementation of major projects. Therefore, the Federal Republic is never to be found at the top of the FDI rankings. In the first half of 2020, German direct investment amounted to just $88.2 million (in the first quarter it was just $18.5 million). According to the BKPM, more than half of the corresponding funds went to the mining and motor vehicle sectors.

GTAI is the foreign trade and inward investment agency of the Federal Republic of Germany. The organization advises foreign companies looking to expand their business activities in the German market. It provides information on foreign trade to German companies that seek to enter into foreign markets.