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Table of Contents
Overview
Overview
With the right policy framework and a strong
commitment to reform, Indonesia should be able to
capitalize on its fundamental economic strengths to
restore investor confidence. Indonesia offers a large
domestic market and a correspondingly large workforce,
abundant natural resources, reasonably modern
telecommunications and other infrastructure, a strategic
location along some of the world’s major trade
routes, and substantial experience with market-based
economics and the international trade and payments
system. Three years after the onset of its economic and
political crisis, Indonesia has a new government led by
President Abdurrahman Wahid and Vice President Megawati
Sukarnoputri. Their economic team negotiated a new
Memorandum of Economic and Financial Policies with the
IMF that was signed in January 2000. The following month,
multilateral and bilateral donors pledged USD 4.7 billion
in assistance for fiscal year 2000 through the
Consultative Group on Indonesia (CGI). The Government
negotiated a second rescheduling of official bilateral
debt through the Paris Club in April.
With reaffirmation of Indonesia’s market-based
economic policy orientation and generous support from the
international community, the stage was set for a recovery
of the investment climate. Investor confidence has,
however, remained depressed, with existing and potential
investors citing a number of concerns: political
uncertainty; upcoming political and fiscal
decentralization; uneven implementation of economic
reform commitments; the unreliable judicial system;
security issues; and treatment of existing investors.
Political uncertainty: President Wahid drew cabinet
members from several parties that had supported his
election; the resulting "rainbow coalition" has
proven an uneasy and quarrelsome combination. The
President has fired several cabinet members; a major
cabinet reshuffle is anticipated after the session of the
People’s Consultative Assembly (MPR) scheduled for
August 2000. Continued power jockeying among parties and
between the executive branch and the legislature, central
bank, and other institutions has further complicated
investors’ assessments of Indonesia’s political
outlook.
Decentralization: In April 1999, the Indonesian
Parliament (DPR) passed two laws devolving authority to
regions (primarily to regencies rather than provinces)
and establishing principles of fiscal decentralization.
Both laws are scheduled in enter into effect in 2001. The
impact of decentralization on investment rules and
procedures -- including the taxing authority of the
regions, new investment approval criteria, and licensing
-- remains unclear. Many provincial governments have
criticized the central government’s slow pace and
lack of consultation in formulating the decentralization
laws’ implementing regulations.
Economic reform: The GOI's major economic policy
challenges remain to increase budget revenues, including
through the privatization of state-owned enterprises
(SOEs); to complete bank recapitalization, including
disposing of assets held by the Indonesian Bank
Restructuring Agency (IBRA) to reduce the program's
budgetary burden; to promote debt restructuring between
Indonesia's corporate debtors and their foreign and
domestic creditors; to redefine the fiscal relationship
between the central, provincial, and sub-provincial
governments; to increase transparency and accountability
of government operations; and to attract private
investment in order to generate employment. In June 2000,
an IMF representative enumerated three major structural
problems that hampered Indonesia’s economic
recovery: its huge public debt (about USD 70
billion); the large number of private assets under state
control that have been neither restructured nor sold; and
the massive amount of unrestructured foreign corporate
borrowing.
Although the GOI has been successful in stemming
inflation and interest rates have dropped dramatically,
exchange rate volatility has re-emerged as a potential
problem. The GOI has articulated a strategy for
rebuilding the banking sector, restructuring corporate
debt, and undertaking other structural reforms,
particularly in the justice sector, but implementation
has been uneven. Of particular concern have been slowness
in disposing of IBRA-held assets and forcing debtors and
former bank owners to court and unwillingness to
privatize SOEs.
Judicial system: The GOI has taken some steps to
foster judicial independence by the promulgation of a new
Law on the Judiciary (No. 35/1999) which transfers most
of the administrative and regulatory functions related to
the court system from the former Ministry of Justice (now
styled the Ministry of Law and Legislation) to the
Supreme Court, and by forming an independent National Law
Commission in December 1999. Nevertheless, the government
still has not announced a thoroughgoing plan for justice
sector reform, substantial steps toward reforming the
courts have yet to be taken, and the judicial system
still does not offer reliable recourse for investors.
Indonesia still ranks in the lower reaches of
transparency and corporate governance assessments of
Asian countries. Perpetrators of Soeharto-era corruption
and the Habibie-era Bank Bali campaign finance scandal
have not yet been brought to account, although a
multitude of investigations into these and other (human
rights, for example) cases is under way. Indonesia’s
Bankruptcy Law, which was amended in 1998 to establish a
separate Commercial Court, has been a disappointment to
creditors. The lack of legal certainty surrounding
contract enforcement and differential treatment of
domestic versus foreign companies are major concerns of
foreign investors. The courts have issued rulings that
ignore binding arbitration clauses in contracts, for
example, in cases involving independent power producers
and a Swiss pharmaceutical firm.
Existing investors: In addition to enduring the more
general problems affecting the investment climate,
existing investors -- particularly in extractive
industries -- have suffered considerable specific
problems at the hands of central and regional government
officials. Some have been criticized by cabinet officers
and other members of the government, who have alleged
that contracts concluded under the Soeharto government
were impaired or who have accused companies of
environmental, labor, human rights, and other abuses.
These allegations have not been accompanied by evidence
or followed up by legal action. Local communities,
impatient for the benefits of decentralization, have
sought to obtain extra-contractual concessions from
companies operating in their areas. Some non-governmental
groups, which have enjoyed unprecedented freedom since
former President Soeharto’s fall, have also
criticized foreign investors. Various foreign investors
have also experienced labor unrest. Some mining ventures
have been forced to suspend operations as a result of
these and related problems.
Security: Plantations and mining operations in
particular have been affected by security issues.
Looting, occupation of land by squatters, and illegal
mining are among the problems investors face. Outbreaks
of sectarian violence in Maluku, Lombok, Central Sulawesi
and other parts of the archipelago, as well as and
separatist movements in Aceh and Papua, continue to
challenge national unity. A perceived breakdown in law
and order tasks the government’s ability to
guarantee the security of foreign and domestic
investments. Filling the security void are a growing
number of vigilante groups, who have made security
concerns more acute.
Despite its economic and political difficulties,
Indonesia has maintained a relatively open foreign
investment regime and has even taken some concrete steps
to streamline its investment application and permit
processes and to facilitate foreign investment. The sharp
drop in investment approval values has started to show
some signs of turnaround in 2000. According to the most
recent statistics covering January 1, 2000 through June
15, 2000, foreign investment approvals were up about 17
percent, rising from USD 1.8 billion for the same period
in 1999 to USD 2.1 billion in 2000.
Note: The following discussion summarizes the legal,
regulatory, and de facto investment framework as of
mid-2000. Further shifts in President Wahid’s
cabinet may occur following the August MPR session. The
FY 2000 (April–December 2000 budget assumes an
average exchange rate of Rp 7000/USD.) The exchange rate
used throughout this report is Rp 9,000/USD1, the rate
prevailing at the time of publication.
next: Openness
to Foreign Investment
Table of Contents
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