Source: Bloomberg, October 3 2019
By Karlis Salna and Rieka Rahadiana
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Indonesian President Joko Widodo said he’ll introduce sweeping changes to labor rules by the end of the year and open up more sectors of the economy to foreign investment, delivering on some of the major reforms investors have been demanding.
Jokowi, as the president is known, said planned changes to the labor law will now only apply to new employees, proposals he’ll discuss with labor unions before taking them to parliament. By restricting the rules to new jobs only, Jokowi can attract businesses wanting to set up shop in Indonesia or looking to expand, while defusing opposition from labor groups.
Speaking from his home town of Solo in Central Java, Jokowi told Bloomberg’s Editor-in-Chief John Micklethwait that it’s his “first priority” to reform the labor rules. Businesses have long complained that generous severance packages, a complex minimum wage system and restrictions on hiring and firing workers make it difficult for them to expand operations.
“Every year there are 3 million new workers in the job market,” Jokowi said. “They must be given room to enter the job market. Second, we want to address investors’ complaints. We have to revise the law and we hope that more investment will create competition among companies to get better workers.”
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Indonesia is trying to make up lost ground against regional peers vying for a slice of the business that’s relocating out of China amid that nation’s escalating trade war with the U.S. So far, smaller rivals like Vietnam are outperforming Indonesia, spurring Jokowi to enact economic reforms that investors have long been pushing authorities to make.
While touring a PT Pan Brothers’s garment factory earlier on Wednesday, the president said he’ll seek to make changes to the law “by the end of this year” at the latest. Job conditions and workers’ rights for those in existing jobs would be protected, he said.
Jokowi will need to win over labor unions first. Tens of thousands of people protested Wednesday in 10 cities, including Jakarta, against planned changes to the labor rules. On top of that, widespread student riots have broken out across the country in recent weeks against controversial changes to a crime bill.
The protests aren’t derailing Jokowi’s reform plans as he prepares to officially begin his second five-year term later in October. He’s demanding ministers work harder and faster to remove the “handcuffs” restricting growth. And in addition to planned tax cuts and changes to labor laws, he wants foreign investment rules to be overhauled.
What Bloomberg’s Economists Say
“President Joko Widodo’s continuation of reforms during his second term — depending on implementation — could increase potential growth by 1-2 percentage points over the next decade. That’s significant for an economy that expanded 5.2% in 2018.”
Tamara Mast Henderson, Asean economist
Indonesia restricts foreign investment in a number of industries from banking to brewing. A plan announced back in November to revise the limits and open up some sectors to as much as 100% foreign ownership was delayed following a backlash from local businesses.
The president said Wednesday he’ll allow 100% foreign ownership in sectors such as health and education in special economic zones. He’ll also create an “apparel zone” in Central Java to build on the key export industry that already exists in the province, and allow 100% foreign investment in the sector.
Relative to the size of its economy and population, Indonesia attracts little foreign direct investment. In a recent World Bank document presented to Jokowi, none of the 33 Chinese companies that announced plans to set up or expand production abroad between June and August chose Indonesia. They preferred locations such as Vietnam and Cambodia.
“We compete against other countries in attracting investment, to create jobs,” Jokowi said. The two main complaints he hears from investors are regarding employment in labor-intensive industries and licensing rules, he said. “We will work on these two as soon as possible.”
Ben Bland, director of the Southeast Asia project at the Lowy Institute, a policy thinktank in Sydney, said it remains to be seen whether Jokowi has the political capital to push ahead with the reforms outlined, particularly around changes to the labor market, or if he backs down in the face of resistance from trade unions and others. “When confronted with opposition, Jokowi is a guy who normally likes to go for consensus, not confrontation,” Bland said in an interview with Bloomberg Television.
Indrawati Stays
The president said he’ll retain Sri Mulyani Indrawati, currently finance minister, in his cabinet, though he declined to say what role she’ll take. A former World Bank managing director, Indrawati has been spearheading efforts to boost tax revenue and keep the budget deficit under control.
Jokowi is keen to shore up the economy as global risks rise and the trade war wreaks havoc in the region. Growth has been stuck around 5% for most of his first term. The government has twice already revised its growth projections for this year lower, seeing expansion of 5.08% now, compared with an initial 5.3%. The economy is projected to grow 5.3% next year.
Exports have been sliding, contracting for a 10th month in a row in August, and the current account deficit, at 3% of gross domestic product, remains a key vulnerability for the economy.
Other economic variables are doing better. Inflation remains well within the central bank’s target range of 2.5%-4.5%, while the jobless rate is at a more than two-decade low. The currency has gained 1.4% against the dollar this year, one of the stronger performers in Asia in 2019.
Jokowi said the government would like to see lower interest rates in the economy, though emphasizing that the central bank conducts monetary policy independently. Bank Indonesia has cut rates three times this year by a total of 75 basis points, rolling back some of last year’s policy tightening.
“Government will not intervene, but I think if rates could fall, it would be good for the real sector,” he said. “They know when to raise or to cut rate.”
(Updates with comment from analyst in third paragraph under Asean Inflows chart)
–With assistance from Tassia Sipahutar, Viriya Singgih, Thomas Kutty Abraham, Stephanie Phang, Yoga Rusmana, Arys Aditya, Richard Lewis, Matt Burley and Michelle Jamrisko.
To contact the reporters on this story: Karlis Salna in Jakarta at ksalna@bloomberg.net;Rieka Rahadiana in Jakarta at rrahadiana@bloomberg.net
To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, ;Thomas Kutty Abraham at tabraham4@bloomberg.net, Ruth Pollard
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