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Indonesia Politics October 2020

Indonesia: Government approves omnibus law, boding well for medium-term investment

In early October, parliament approved the long-awaited “omnibus” bill, which will markedly overhaul the country’s business, labor and environmental regulations with a view to boosting competitiveness. The move should be supportive for investment in the medium term, although the near-term outlook will continue to be dominated by Covid-19. Moreover, there are question marks over the government’s ability to implement the reforms in a swift manner given its track record, while widespread protests could lead to some elements of the package—particularly those regarding labor regulations—being watered down.

Looking at FDI, the omnibus bill reduces the number of sectors off-limits to foreign investment from over 300 to just 6. The process of obtaining business permits will be simplified, environmental regulations loosened, and the labor market liberalized through the reduction of severance pay, increases in overtime and the abolishment of the sectoral minimum wage. Taken together, the measures should make Indonesia more attractive to investors and a simpler place to conduct business—the country currently languishes in 73rd place in the World Bank’s Ease of Doing Business rankings.

As Aldian Taloputra, senior economist at Standard Chartered, states:

“[The bill] provides legal certainty for businesses, simplifies investment licencing, opens more sectors to investment by removing the negative list, and extends fiscal incentives to corporations. Labour regulations have been revised to balance maintaining worker protection with new job creation, especially by lowering uncompetitive severance payments. The omnibus bill also strengthens the central government’s role in resolving contradictions between sector and government regulations. […] We view the bill positively, as it provides the strong legal framework the country needs to accelerate structural reforms.”

However, analysts at Nomura caution that implementation will be key:

“The boost to potential growth from these reforms will take time and will largely depend on execution. The government’s record on previous landmark pieces of legislation and yet much smaller than the Omnibus Law is weak, in our view, and hence we remain cautious on the timing of the implementation and the extent of enforcement. Partly for this reason, as well as the global growth outlook and strong competition from regional peers in the post-Covid-19 world, we think the impact on FDI inflows also remains uncertain at this stage. […] The additional challenge today is that we think the protests against the Omnibus Law, if they worsen, could also cause some delays in the drafting of the IRR and could include a compromise in details that water down the intended impact of the Omnibus Law. We also do not rule out challenges in the constitutional court as the Omnibus Law is the first time that such legislation has been passed in the country.”

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