SOME five months after the Joko Widodo administration took leadership in Indonesia, there is still no clear indication whether Asean’s largest economy plans to push ahead with the previous government’s plans to limit foreign ownership in sectors such as banking and plantations.

Economists say foreign investors continue to face uncertainty over their investments in the archipelago as the new administration has been giving mixed signals on its stand on the matter. Many had expected a more open investment climate under Joko.

Finance minister Bambang Brodjonegoro, in an interview with The Edge during the Credit Suisse Asian Investment Conference in Hong Kong last month, says the government is unlikely to come up with any policies that will jeopardise foreign direct investment (FDI) as it recognises that such investments remain a key driver of the country’s growth.

But, in the same breath, he says the government needs to strike a balance between encouraging FDI and ensuring that Indonesians have a bigger share in certain sectors, which may include banking. Such nationalistic sentiment at this time is “understandable”, he says, given how the domestic economy has grown over the years, giving birth to a lot of new entrepreneurs and conglomerates.

“So, of course there is an aspiration that some of the sectors or businesses in Indonesia should also be ‘owned’ by the Indonesians. If we’re talking about Indonesia say, 20 years ago, or after the Asian financial crisis (in 1997/1998), yes, we really needed so-called total foreign ownership [in some sectors]. But when the domestic economy is growing, the demand is there and I think — like everywhere else in the world — there will be some kind of [nationalistic] sentiment.

“But, at the same time, we will focus more on the macroeconomic policy. We don’t want any ‘false’ policy creating any kind of instability for our economy,” he explains.

Bambang indicates that a new law on insurance passed by Parliament last September under the outgoing government of Susilo Bambang Yudhoyono may be the way forward in terms of the current government’s approach to foreign ownership in certain sectors. (Bambang was Indonesia’s vice-minister of finance during Susilo’s presidency).

The new insurance law, which sets out a comprehensive regulatory framework for the sector and replaces an older law, maintains the foreign ownership cap in local insurance companies at 80% despite initial plans by lawmakers to reduce it to 49%.

While this might seem like good news for foreign investors in the sector, lawyers and industry observers note that the new law also has an underlying nationalistic sentiment as the government or the Financial Services Authority (FSA) is able to lower the foreign ownership limit in the future via new regulations. This is provided by a clause in the law.

To this, Bambang says: “Of course, there is a clause saying that if necessary, the regulator, the FSA, can review the ownership — they can, not have to — because the FSA needs to consider the situation in the financial sector, especially the insurance sector. They can have their own say because they are independent ... they have to review the sector, [see] whether it is ready to absorb more domestic ownership or remain as it is.”

“I mean, of course, the regulator or the Indonesian government needs to have a stand [when deciding whether to restrict foreign ownership further in some sectors]. This is a political issue rather than a business issue, so we have to find a balance between the political issue and the business issue. So far, for insurance, the foreign investors have not been jittery ... they still come.

“So, I think we’ve already set some kind of precedent in the insurance industry [which], of course, could be replicated to some extent in the banking or other sectors of the economy.”

The 80% foreign cap on Indonesia’s insurance companies is higher than that of other large Asean countries, an obvious indication that the government is still encouraging foreign interest in the sector because it needs to be developed further. (Malaysia has a limit of 70% while Thailand and India have a 49% cap.)

But investors wonder if the Indonesian government may be as open to foreign participation in banking and other sectors. “Ultimately, we see that there’s still no clarity with regard to treatment of foreign investors in sectors that are of interest. They’re giving mixed signals ... they definitely want more foreign investment, but in sectors they want to boost,” observes Maybank Investment Bank Bhd group chief economist Suhaimi Ilias.

A new draft of a bill seeking to limit foreign ownership in Indonesian banks at 40% is expected to be proposed soon by the House of Representatives, the main lawmaking body. Foreign owners of local banks will be given a 10-year period after the passing of the law to divest their shares.

According to Indonesian media reports earlier this year, the proposed bill will be a priority for 2015.

Such laws will have a major impact on Malaysia’s Malayan Banking Bhd and CIMB Group Holdings Bhd, which own big controlling stakes in Indonesian lenders Bank Internasional Indonesia and Bank CIMB Niaga respectively.

The Indonesian government had in 2012 already limited foreign holdings in local lenders to a maximum 40% from 99% previously. The new ruling was, however, meant for new, rather than existing, investments in the sector.

Last August, the government also talked about restricting foreign ownership of plantation assets to no more than 30% from 95%, with the aim of opening up the sector to smaller, local players.

The news caused a stir among Malaysia’s bigger plantation groups as most of them, including Sime Darby Bhd, Kuala Lumpur Kepong Bhd and Genting Plantations, have strong exposure to Indonesia, having made sizeable investments in assets like landbank over the last 10 years.

“They (House of Representatives) haven’t started any discussion with the government [on the banking bill]. Yes, they plan [to]. Of course, everybody has their own ideas but I think they should take a look at the bigger impact, from the macro perspective. I think that would be my point  — we have to take a look at the macro perspective rather than just a microscopic approach.”

Does that mean he is not keen to see further restrictions on the banking industry? “Well, I have to admit that the banking sector is a heavily capitalised sector that needs injection of a lot of capital, and with the implemention of Basel III (which dictates stricter capital rules), that will be even more difficult. So, we have to really evaluate whether Indonesian ownership is ready for such a tightly regulated sector.

“I mean, the banking sector is unlike plantation [in that it is] heavily regulated. So, it means you have to ready with capital injection whenever the authority tells you to inject the capital. And I think we have to be very careful with that. Of course, we will discuss with Parliament to understand the common problems of our banking or financial industry in general.”

According to Indonesian news reports, moves to put forward the new draft bill will proceed although Bambang and the finance ministers of Asean countries inked the Asean banking integration framework in Kuala Lumpur on March 21. The landmark agreement will enable “qualified” banks of each country to operate more freely in other markets in the region based on reciprocal bilateral arrangements.

“I think it clarifies our stance, which is, we’re open to any foreign ownership [in Indonesia] as long as the reciprocity principle is respected. With Malaysia, for example, we’ve already signed the bilateral [agreement], so that’s why Indonesian banks can operate in Malaysia [and vice versa]. But we haven’t reached the same deal with, for example, Singapore. Once the deal with Singapore is reached, we won’t have any problems,” he explains.

Indonesian banks like Bank Mandiri have long complained about not having the same kind of rights in Malaysia as Malaysian lenders do in Indonesia. Mandiri has been unable to operate as a full branch due to large capital requirements imposed by Bank Negara Malaysia.

Now that the banking integration framework has been inked, Bank Mandiri head of international banking Ferry Robbani says the lender is undertaking an internal review of its expansion plans in Malaysia. According to a Jakarta Post news report on March 24, he said, “We are discussing directly with Bank Negara because there are some things regarding permits that need clarification. I cannot ensure when we will conclude our review, but we want to make it clear before taking further steps.”

Bambang says it is up to Bank Mandiri to decide on its expansion, if any, in Malaysia. “More importantly, from a regulatory point of view, it is possible. That’s it. We don’t really need to see Indonesian banks opening branches in Malaysia, in Singapore  — no. We just want the reciprocity principle to be appreciated and respected.”

He says central banks still need to discuss further the criteria for a bank to be a qualified Asean bank. In Indonesia, the possible banking candidates will likely be the ones with the largest assets — the largest is currently Bank Mandiri — and the government would be keen to have more than one qualified bank, if allowed. “The more, the merrier,” he says.

Investment

Despite the uncertainties for foreign investors, Indonesia has been one of the top recipients of FDI flows in Asean, along with the Philippines. Still, data from the Indonesia Investment Coordinating Board (or BKPM) shows that FDI growth has slowed from 31% in 2012 to 17.7% in 2013 and 13.5% in 2014.

Last year, foreign and domestic direct investments in Indonesia came up to IDR463.1 trillion (RM131 billion), a 16.2% year-on-year growth, which was deemed quite decent considering the uncertainties triggered by the fragmented results of the country’s legislative and presidential elections.

It was nevertheless a slowdown compared with the over 20% growth of previous years. Indonesia’s economy grew at 5.02% last year,its slowest pace in five years.

“The (slowdown) in direct investment growth last year was quite understandable. First of all, because of the slowdown in the economy itself, and secondly, it was a political year and nobody wanted to make too many investment decisions.

“So, hopefully this year, we’ll start to recover. I believe it should be back at the normal growth rate, 25% or even more, especially since we have introduced a one-stop service centre to cut through red tape on applications for licences, permits and so on. We’ve also provided renewed tax incentives that should be attractive for several areas, manufacturing especially,” he says. However, he adds that there may be a slowdown in investments in the oil and gas and mining sectors because of the low prices.

BKPM has targeted IDR519.5 trillion in total direct investment this year, of which IDR343.7 trillion would be FDI.

Last year, Indonesia’s most popular sectors for FDI were its mining, food industry and transport industries. Singapore was the largest foreign direct investor with US$5.8 billion, followed by Japan (US$2.7 billion) and Malaysia (US$1.8 billion).

Indonesia is aiming for faster economic growth of 5.8% this year and 6.7% next year. Bambang acknowledges that these are ambitious targets that will depend very much on the global environment. The country needs to work “extra hard”, otherwise it risks facing growth of “maybe 5%” like last year, he says.

He adds that it will be important to boost both government and private investment in the country; the area of focus being manufacturing and infrastruture. “There are two priorities. First is manufacturing, because we really need to increase the contribution of manufacturing to our GDP. Secondly, infrastructure, because we really infrastructure acceleration.”

In fact, the government has estimated that it needs IDR5,000 trillion in infrastructure investment over the next five years to build airports, toll roads and power plants, among others.

What projects would he like Malaysian companies to participate in in Indonesia? Bambang says: “I think Malaysia is already involved in toll roads — it is one of the investors in a sections of the Trans-Java toll road (in West Java). I hear Malaysia will also be participating in power plant projects, either in Kalimantan or Sumatra. There is some kind of interest from Malaysia. And then, of course, airports, seaports ... we’re also open. I believe those are the most interesting areas.

“Also, an airport rail link from Jakarta (city) to the airport like your KL Sentral to KLIA project, and then water supply for several cities. So, there are a lot of options, actually.”

He says some projects will be done via public-private partnerships, while others — like airports and seaports — will be via pure private concessions.

The big tenders coming up are mainly for power plants nationwide, he says. “They will mostly be in Java, Sumatra and Kalimantan. Over the next five years, we plan to increase capacity by 75,000mw, basically, just to cope with the economic growth itself,” he adds.

Meanwhile, he says there is potential to export electricity from Sumatra to Peninsular Malaysia. “Maybe Malaysia will build the power plant, but the electricity will be sent back to Malaysia. I think that is a plan. In fact, that has been discussed during the ASEAN Infrastructure Fund board meeting,” he says, without elaborating further.

This article first appeared in The Edge Malaysia Weekly, on April 13 - 19, 2015.

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