Indonesia managed to enter the top five in the Global Retail Development Index, reflecting the strength and potential of the nation's retail sector. In the 2016 edition of the index, compiled by global consulting company AT Kearney, Indonesia jumped to fifth position (from 12th in the 2015 edition). The Global Retail Development Index measures the attractiveness of the retail sector in 30 developing economies as well as identifying investment opportunities in these markets. China remains number one in the ranking, followed by India, Malaysia and Kazakhstan.

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The move of the Indonesian government to relax foreign ownership rules regarding e-commerce businesses in Indonesia has also given rise to expectation that the country's major e-commerce players (including foreign ones) will be interested to list their companies on the Indonesia Stock Exchange through an initial public offering (IPO). Generally an IPO improves a company's transparency and corporate/financial management. E-commerce businesses are particularly in need of consumers' trust and confidence and therefore an IPO is considered a good corporate move.

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Indonesian rubber producers do not welcome the government's decision to open the nation's crumb rubber sector to foreign ownership for the full 100 percent. This decision is part of the government's tenth economic stimulus package, announced last week. Stakeholders in Indonesia's rubber sector argue that current installed production capacity of existing rubber processing plants in Indonesia already exceeds domestic demand. Crumb rubber is recycled rubber produced from automotive as well as truck scrap tires.

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On 27 December 2015, Indonesia Investments released the latest edition of its newsletter. This free newsletter, which is sent to our subscribers once per week, contains the most important news stories from Indonesia that have been reported on our website over the last seven days. Most of the topics involve economic matters such as Indonesia's 8th economic stimulus package, inflation, how to set up a legal entity in Indonesia (for foreign investors), updates on Indonesia's coal, cocoa and geothermal industries, and more.

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Contrary to earlier information, Indonesia's Financial Services Authority (OJK) is expected to somewhat limit investment opportunities for foreign investors in the country's banking sector. Nelson Tampubolon, Commissioner for Banking Supervision at the OJK, said foreigners will only be allowed to acquire a majority-stake in small Indonesian banks (categorized under the BUKU 1 system) provided that the foreigner purchases two (small) banks and merge these into one entity.

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After having been limited to 40 percent for the last three years, foreign investors are now allowed to control a more-than-40 percent stake in Indonesian banks, provided that they buy two local banks and merge them into one. Indonesia's financial authorities gave the green light to two foreign banks (China Construction Bank Corporation and the South Korea-based Shinhan Bank) that seek to tap Indonesia's lucrative banking sector.

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Today (28/07), Indonesian President Joko Widodo, who is often referred to as Jokowi, went on his first state visit to Singapore where he will discuss trade, investment and bilateral issues with Singaporean President Tony Tan Keng Yam, Prime Minister Lee Hsien Loong, and 150 Singaporean CEOs in a bid to enhance cooperation between both nations. President Widodo is accompanied by Indonesian Trade Minister Rachmat Gobel, Chief Economics Minister Sofyan Djalil, and Foreign Affairs Minister Retno Marsudi, among others.

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Commission XI of Indonesia’s House of Representatives (DPR), which oversees the country’s banking sector, will soon propose a new draft of a bill that sets to limit foreign ownership in Indonesian banks at 40 percent (from 99 percent currently). Established banks that are majority-owned by foreigners will be given a 10-year period to divest their shares after the bill has been passed into law (reportedly an earlier draft only provided a five-year transition period for this mandatory divestment).

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As the number of foreign tourists rise rapidly and there is increasing demand for conferences, exhibitions and business meetings, Indonesia will see a massive inflow of investments for the construction of hotels and condominium hotels (condominium hotels combine features of apartments and hotels). In 2015, the value of new (condo) hotels projects is estimated at IDR 38.5 trillion (USD $3.2 billion), up 57.3 percent from last year. Locations that attract tourists and locations close to education centers are the primary choice.

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Indonesia’s House of Representatives (DPR) has passed a new plantations bill that aims to maximize land usage and opens up Indonesia’s plantation sector to smallholders. However, the retroactive clause that would limit foreign ownership to a maximum of 30 percent (from 95 percent currently) was dropped from the final version. This clause was highly controversial and would have been a major obstacle for foreign companies engaged in Indonesia’s plantation sector (such as Golden Agri-Resources and Wilmar International).

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Indonesia's economic growth in the first quarter of 2016 was rather disappointing at 4.92 percent (y/y), below analyst estimates that averaged around 5 percent (y/y), due to slowing household consumption, private investors being in a wait-and-see mode, and relatively weak government spending (a usual phenomenon at the year-start). Indonesia's construction sector also grew weakish in Q1-2016. However, the construction sector still has good prospects in the years ahead on the back of the government's infrastructure projects.

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The new negative investment list 2016 is not yet issued by Indonesian President Joko Widodo. However along with the launch of the tenth economic policy package, the government is currently processing the new draft of this list. Although not yet issued, in this column we discuss the most likely changes to be implemented in the new negative investment list 2016. The current draft regulation removes 35 business fields form the negative investment list. Besides that, more business fields are reserved for small and medium sized companies (local companies).

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The Indonesian government's decision to limit foreign ownership in the horticulture sector to a maximum of 30 percent (through Law No. 13/2010 on Horticulture), from 95 percent previously, continues to cause a polemic as such protectionism may be a big disadvantage to the development of Indonesia's horticulture sector. Moreover, the law works retroactively implying that existing companies owned by foreign investors need to divest their majority ownership interests. In Law No. 13/2010 foreigners were given four years to divest their shares.

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Indonesia is not the easiest place to invest for foreign investors. This is reflected by the World Bank's Doing Business 2014 index in which Indonesia ranks 120th. In a business forum, held last week in Beijing, Chinese businessmen expressed a number of matters that blocked or seriously delayed their investments in Indonesia. For Indonesia (both domestic and foreign) investment realization, particularly in infrastructure, is important as investments is considered the main driver for the country’s economic growth in 2016.

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The obligation for foreign companies to perform a divestment of part their shares to Indonesian companies has raised already much discussion among foreign investors. Before the enactment of BKPM regulation number 5/2013 on Guidelines and Procedures on Licensing and Non-licensing of Capital Investment as amended by BPKM regulation number 12/2013 (BKPM Regulation), divestment was required for all foreign companies (PMA) in Indonesia. The new regime of the BKPM Regulation removes this obligation, even though there are still sectors in Indonesia which require foreign companies to divest, such as the mining sector.

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In late September, the Minister of Public Works (Minister) issued Minister Regulation number 10/PRT/M/2014 regarding Guideline Requirements for Giving Permission Foreign Construction Service Representative Office (New Regulation). The New Regulation for construction representative offices in Indonesia replaces the old Minister regulation 05/PRT/M/2011 (Old Regulation) which had a similar title. The New Regulation has become more comprehensive than the Old Regulation and in this column we will discuss the most significant changes for foreign investors.

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Indonesian parliament (DPR) decided not to limit foreign ownership in Indonesian insurance companies. Currently, foreigners can have an 80 percent stake in a local insurance company. A new insurance bill on this matter is expected to be passed in a plenary session next month. This bill will enable foreign investors to continue to own local insurance companies through the share-purchase mechanism at the Indonesia stock exchange (IDX). Another important point in the new bill involves the legal entity of the local insurance firm.

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Foreign ownership of plantations in Indonesia may be limited to a maximum of 30 percent if a new draft bill designed by Indonesian parliament is approved. This draft bill aims to encourage local participation within Indonesia’s plantation sector at the expense of foreign ownership. Currently, foreign ownership of plantations in Indonesia is set at a maximum of 95 percent. The draft bill also aims to simplify complex rules regarding land use, protect indigenous people, and will make it easier to prosecute companies responsible for forest fires.  

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Establishment of a company in Indonesia is done through a foreign investment and is subject to specific establishment requirements. A foreign investment is by law 25 of 2007 (Investment Law) defined as an investing activity conducted by a foreign investor for running a business inside Indonesia (including company establishment). Such foreign investment can be conducted either by using 100% foreign capital (which is subject to certain restrictions) or by partially using domestic capital. A foreign investor can be a foreign person, a foreign company or a foreign government body.

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A Foreign Representative Office (Kantor Perwakilan Perusahaan Asing [KPPA]) is a more general form of representative office than the foreign trade representative office and the foreign construction services representative office as we covered in previous columns. The Foreign Representative Office is regulated by BKPM, whereas the aforementioned representative offices are regulated by respectively the ministry of trade and the ministry of public works. Due to the general nature of a Foreign Representative Office, it is typically set up to provide managerial support to the parent company abroad.

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