The head of the Indonesian Investment Coordinating Board (BKPM) has urged the country’s central bank to speed up regulatory processes in the financial sector. This follows the introduction of a new law in September 2007 designed to bring Indonesia's foreign investment climate into line with that of competitor countries.
Muhammad Lutfi, the Board’s chairman, told Emerging Markets that his government agency can now licence investment in the financial sector, but regulation remains in the hands of Bank Indonesia governor Burhanuddin Abdullah, along with the finance ministry and Jakarta Stock Exchange. Lutfi said a lighter touch from the central bank would not pose risks, given how cautious the management of the sector has been since the 1997 Asia crisis.
“The loans-to-deposits ratio is at 62%, and non-performing loans are less than 6%, so there is room for the central bank to go a bit easier,” said Lutfi, who reports directly to Indonesian President Susilo Bambang Yudhoyono.
He added that the new law, intended to establish his agency as a “one-stop shop” for foreign investors, should put Indonesia “on a par with Thailand and Malaysia, and ahead of India and Vietnam” in terms of creating a supportive investment environment.
Even before the investment law, Indonesia had jumped 10 places in the World Bank/IFC “Ease of Doing Business” report for 2008, to 123. And foreign investment has more than tripled in 2007, to almost $33 billion, according to the BKPM.
The new law includes legal guarantees of equal treatment for foreign companies, easier immigration procedures for investors, and full freedom to repatriate profits – by contrast with a number of Asian countries which retain capital account controls.
Lutfi told a seminar in London that the government also hoped to introduce amendments to Indonesia’s labour laws by April 2008, to modify the “incomplete” implementation of the legislative package passed in 2003.
“The 2003 legislation implemented regulations for workers without introducing safeguards for employers. The law on the right to strike, overtime pay and the minimum wage will be clarified,” said Lutfi.
His deputy, Darmawan Djajusman, argued that the investment law would transform Indonesia’s approach to foreign investors from “red tape to red carpet.” He explained that all the Board’s licensing functions would soon be carried out at its regional offices across Indonesia, to encourage greater activity beyond the capital Jakarta and the surrounding areas of Java.
Attracting infrastructure finance is a priority, Djajusman explained, obliging Indonesia to “change its investment mindset.” He estimated that the country needs $123 billion in infrastructure investment over the next five years, of which the government can provide no more than $24 billion.
He added that the agency was asking for the provision of a “tax holiday” for new investments, but this would need sign-off from the finance ministry because of the implications for public finances.
Finance minister Sri Mulyani Indrawati is grappling with the effects of soaring global oil prices on the Indonesian budget. She introduced a series of fiscal amendments earlier this week, warning that if oil stays around $100 per barrel, it could at almost 55 trillion rupiah to next year’s budget deficit.