Investors spooked by the negative impact of the virus on the global economy are running for cover. Despite so, the Joko Widodo administration is pushing through an ambitious piece of legislation that it hopes will act as a cure for its economic ills.
As of Friday September 28, 2020 the Dow Jones Industrial Index had fallen more than 3,500 points or 12%, its biggest weekly percentage fall since the 2008 global financial crisis.
The sell off was largely due to the growing health concern over the novel corona virus or NOVID-19 as it spreads across the globe. Investors spooked by the negative impact of the virus on the global economy are running for cover.
“What we have right now is a very scary global health scare that has caused complex supply chains to stall,” said Art Hogan, chief market strategist at National Securities in a CNBC article. “As such we have a supply chain shock currently,” he added noting that interest rate cuts may not be the correct medicine for the global economy.
Investor jitteriness is also impacting Indonesia’s economy and market sentiment. As Chinese factories remain close, the supply of key machinery and raw materials from China to Indonesia is expected to slow significantly. “The Peak of the corona virus was on January 20 to 30 and with one-to-two month lag, the full effect would be felt in March, Susiwijono, the secretary of the Coordinating Minister for Economic Affairs told Antara news agency.
Annual trade between the two countries is more than US$72 billion while China is also a key source for foreign direct investments for Indonesia.
Omnibus Bill: An Elixir for Economic Ills
Against this backdrop and rising concern over a slowing economy, President Joko Widodo’s government is pushing through an ambitious piece of legislation that it hopes will act as a cure for its economic ills.
The bill, which encompasses more than 1,000 pages, has been submitted to Parliament with President Jokowi wanting it discussed and ratified within 100 days. The Omnibus Bill is seen as an elixir to fix all the problems plaguing the country and hopefully clear the path for direct foreign investments to once again flow in.
According to Douglas Ramage, managing director of Bower Group Asia, Indonesia’s public discourse has shifted very quickly from religious identity and politics to economic reforms and competitiveness as the country faces up to the fact that it is not attracting FDIs due to a bloated bureaucracy and past failed economic policies.
“There is an unprecedented laser focus on policy and technocratic solutions within the cabinet,” noted Ramage. “There is a realization now that the country is not competitive and that the world’s best companies are not investing in Indonesia.”
Without simplifying regulations Indonesia will not attract new investments and without investments the country will not create new jobs.
“The thinking in the past was that Indonesia was too big to ignore and that investors would come no matter what,” added Ramage. “That thinking resulted in flat economic growth and falling investment.”
The Devil is in the Details
With the focus now firmly on economic growth and reform, the Omnibus Bill will address some pressing and ongoing issues such as: eliminating the negative investment list; revising the rigid labor laws; relaxing tight work permit restrictions on expatriates; improving the quality of human resources.
The government is highly cognizant of the fact that Indonesia requires new inflows of FDIs, said Septian Harjo Seto, Deputy Minister Interim at the Ministry of Investment and Mining under the Coordinating Ministry of Maritime Affairs and Investment. Speaking at a recent event organized by the Swiss-Indonesia Chamber of Industry, he noted the government is hoping to speed up reforms to ease of doing business in the country.
“Our efforts are starting to show some results as reflected in Indonesia’s improved rankings,” he said. “Improving human resources is especially critical in the era of Industry 4.0 if we are to be competitive.”
Septian used the example of the super deductible tax incentive rolled out by the government as an illustration of the government’s seriousness in attracting FDIs, adding that not many multinational companies are aware of such programs.
While these initiatives are welcomed by the foreign business community, greater collaborations in needed between the government and the business community, said James Castle, founder and chairman of Castle Asia. “Collaboration is important and it should be at the institutional level,” he noted.
“There is no magic formula. It is all about hard work, commitment and alignment as Indonesia has a reputation of being a complex regulatory climate for investment,” Castle added. “For the first time the President has acknowledged that Indonesia is not competitive and we have to improve. This is a critical time for Indonesia and President Jokowi’s boldness should not be underestimated.”
No Easy Passage
Despite the government’s best intentions, the Omnibus Bill will not have an easy passage through parliament. Labor unions and environmental groups have already voiced strong opposition to the bill.
Indonesia has one of the most rigid labor laws in the world which have hindered investments but unions cite the erosion of worker rights under the new bill as reason for their opposition.
Environmentalists opposed the bill citing unsustainable growth with the relaxation of the environment impact assessment (Amdal), and safety concerns on less stringent building permit requirements in the name of economic growth. The Amdal and IMB requirements have been criticized by business players as adding unnecessary red tape to doing business.
In response, Coordinating Political, Legal and Security Affairs Minister Mahfud MD noted: “Issue the business permit first. If a business fails to comply [with the Amdal], we will revoke their permits.”
The challenge for the Jokowi administration will be finding the right balance between boosting growth and providing sufficient protection for workers and the environment. Many of the issues raised will be discussed during the Parliamentary discussions as the House of Representatives is expected to seek public feedback on the articles outlined in the Bill.
According to Ramage, the key lies in the fact if mindsets have changed in Indonesia or is the country still very much tied to its highly protective and nationalistic ideology. In a fast changing global environment, flexibility and a willingness to adapt are critical factors in determining whether a country sinks or swims.