Indonesia

Executive Summary

Indonesia’s population of 268 million, GDP over USD 1 trillion, growing middle class, and stable economy all serve as attractive features to U.S. investors; however, different entities have noted that investing in Indonesia remains challenging.  Since 2014, the Indonesian government under President Joko (“Jokowi”) Widodo, now in his second and final five-year term,  has prioritized boosting infrastructure investment and human capital development to support Indonesia’s economic growth goals.  As he began his second term in October 2019, President Jokowi announced sweeping plans to pass omnibus laws aimed at improving Indonesia’s economic competitiveness by lowering corporate taxes, reforming rigid labor laws, and reducing bureaucratic and regulatory barriers to investment.  However, with the fallout from the Covid-19 pandemic, the government shifted its focus to providing fiscal and monetary stimulus to support the economy.  Regardless of the outcome of further reforms, factors such as a decentralized decision-making process, legal and regulatory uncertainty, economic nationalism, and powerful domestic vested interests in both the private and public sectors, create a complex investment climate.  Other factors relevant to investors include: government requirements, both formal and informal, to partner with Indonesian companies, and to manufacture or purchase goods and services locally; restrictions on some imports and exports; and pressure to make substantial, long-term investment commitments.  Despite recent limits placed on its authority, the Indonesian Corruption Eradication Commission (KPK) continues to investigate and prosecute corruption cases.  However, investors still cite corruption as an obstacle to pursuing opportunities in Indonesia.

Other barriers to foreign investment that have been reported include difficulties in government coordination, the slow rate of land acquisition for infrastructure projects, weak enforcement of contracts, bureaucratic inefficiency, and ambiguous legislation in regards to tax enforcement. Businesses also face difficulty from changes to rules at government discretion with little or no notice and opportunity for comment, and lack of consultation with stakeholders in the development of laws and regulations.  Investors have noted that many new regulations are difficult to understand and often not properly communicated to those affected.  In addition, companies have complained about the complexity of inter-ministerial coordination that continues to delay some processes important to companies, such as securing business licenses and import permits.  In response, in July 2018 the government launched a “one stop shop” for licenses and permits via an online single submission (OSS) system at the Indonesia Investment Coordinating Board (BKPM).  Indonesia restricts foreign investment in some sectors through a Negative Investment List that Indonesian officials have indicated will be scrapped as part of omnibus legislation.  The latest version, issued in 2016, details the sectors in which foreign investment is restricted and outlines the foreign equity limits in a number of other sectors.  The 2016 Negative Investment List allows greater foreign investments in some sectors, including e-commerce, film, tourism, and logistics.  In health care, the 2016 list loosens restrictions on foreign investment in categories such as hospital management services and manufacturing of raw materials for medicines, but tightens restrictions in others such as mental rehabilitation, dental and specialty clinics, nursing services, and the manufacture and distribution of medical devices. Companies have reported that energy and mining still face significant foreign investment barriers.

Indonesia began to abrogate its more than 60 existing Bilateral Investment Treaties (BITs) in 2014, allowing some of the agreements to expire in order to be renegotiated.  The United States does not have a BIT with Indonesia.

Despite the challenges that industry has reported, Indonesia continues to attract significant foreign investment.  Singapore, Netherlands, United States, Japan and Hong Kong were among the top sources of foreign investment in the country in 2018 (latest available full-year data). Private consumption is the backbone of the largest economy in ASEAN, making Indonesia a promising destination for a wide range of companies, ranging from consumer products and financial services, to digital start-ups and franchisors.  Indonesia has ambitious plans to improve its infrastructure with a focus on expanding access to energy, strengthening its maritime transport corridors, which includes building roads, ports, railways and airports, as well as improving agricultural production, telecommunications, and broadband networks throughout the country. Indonesia continues to attract U.S. franchises and consumer product manufacturers.  UN agencies and the World Bank have recommended that Indonesia do more to grow financial and investor support for women-owned businesses, noting obstacles that women-owned business sometimes face in early-stage financing.

Philippines

Executive Summary

The Philippines continues to improve its overall investment climate with 2019’s biggest highlight being Standard & Poor’s upgrade of its rating to BBB+, the country’s highest credit rating to date. Overall sovereign credit ratings remain at investment grade based on the country’s sound macroeconomic fundamentals. The Philippines has received record-high foreign investment pledges approved by its investment promotion agencies (IPAs) at USD 7.65 billion in 2019, which more than doubled from 2018’s USD 3.60 billion. (https://psa.gov.ph/sites/default/files/Total%20Approved%20Foreign%20Investment%20by%20Investment%20Promotion%20Agency%202018%20to%202019.xlsx) Actual foreign direct investment (FDI) in the country, however, still remains relatively low when compared to the Association of Southeast Asian Nations (ASEAN) figures; the Philippines ranks fifth out of ten ASEAN countries for total FDI in 2019. FDI declined by almost 24 percent in 2019 to USD 7.6 billion from USD 9.9 billion in 2018, according to the Bangko Sentral ng Pilipinas (the Philippine’s Central Bank), mainly due to lower equity capital placements. The majority of FDI investments included manufacturing, financial/insurance activities, real estate, tourism/recreation, and transportation/storage. (http://www.bsp.gov.ph/statistics/spei_new/tab9_fdi.htm)

Foreign ownership limitations in many sectors of the economy constrain investments. Poor infrastructure, high power costs, slow broadband connections, regulatory inconsistencies, and corruption are major disincentives to investment. The Philippines’ complex, slow, and sometimes corrupt judicial system inhibits the timely and fair resolution of commercial disputes. Investors often describe the business registration process as slow and burdensome. Traffic in major cities and congestion in the ports remain a regular cost of business. Proposed tax reform legislation (Corporate Income Tax and Incentives Rationalization Act — CITIRA) to reduce the corporate income tax from ASEAN’s highest rate of 30 percent could be positive for business investment, although some foreign investors have concerns about the possible reduction of investment incentives proposed in the measure.

The Philippines continues to address investment constraints. In late 2018, President Rodrigo Duterte updated the Foreign Investment Negative List (FINL), which enumerates investment areas where foreign ownership or investment is banned or limited. The most significant changes permit foreign companies to have a 100 percent investment in internet businesses (not a part of mass media), insurance adjustment firms, investment houses, lending and finance companies, and wellness centers. It also allows foreigners to teach higher educational levels, provided the subject is not professional nor requires bar examination/government certification. The latest FINL allows 40 percent foreign participation in construction and repair of locally funded public works, up from 25 percent. The FINL, however, is limited in scope since it cannot change prior laws relating to foreign investments, such as Constitutional provisions which bar investment in mass media, utilities, and natural resource extraction.

Implementing rules and regulations for The Ease of Doing Business and Efficient Government Service Delivery law of 2018 (Republic Act 11032) were signed in 2019. The law allows for a standardized maximum deadline for government transactions, a single business application form, a one-stop shop, an automation of business permits processing, a zero-contact policy, and a central business databank (https://www.officialgazette.gov.ph/2018/05/28/republic-act-no-11032/). Touted as one of the Duterte Administrations’ landmark laws, it created an Anti-Red Tape Authority under the Office of the President that oversees national policy on anti-red tape issues and implements reforms to improve competitiveness rankings. The authority also monitors compliance of agencies and issues notices to erring and non-compliant government employees an officials.

There are currently several pending pieces of legislation, such as amendments to the Public Service Act, the Retail Trade Liberalization Act, and the Foreign Investment Act, all of which would have a large impact on investment within the country. The Public Service Act would provide a clearer definition of “public utility” companies, in which foreign investment is limited to 40 percent according to the 1987 Constitution. This amendment would lift foreign ownership restrictions in key areas such as telecommunications and energy, leaving restrictions only on distribution and transmission of electricity and maintenance of waterworks and sewerage systems. The Retail Trade Liberalization Act aims to boost foreign direct investment in the retail sector by changing capital thresholds to reduce the minimum investment per store requirement for foreign-owned retail trade businesses from USD 830,000 to USD 200,000. It also would reduce the quantity of locally manufactured products foreign-owned stores are required to carry. The Foreign Investment Act would ease restrictions on foreigners practicing their professions in the Philippines and give them better access to investment areas that are currently reserved primarily for Philippine nationals, particularly in sectors within education, technology, and retail.

While the Philippine bureaucracy can be slow and opaque in its processes, the business environment is notably better within the special economic zones, particularly those available for export businesses operated by the Philippine Economic Zone Authority (PEZA), known for its regulatory transparency, no red-tape policy, and one-stop shop services for investors. Finally, the Philippines plans to spend more than USD 180 billion through 2022 to upgrade its infrastructure with the Administration’s aggressive Build, Build, Build program; many projects are already underway.