OBG Asia regional editor Patrick Cooke writes that Indonesia's CEO Survey participants agreed that the ease of doing business was now better than it was two years ago.
Since the election of President Jokowi, as he is popularly known, Indonesia has jumped 68 places in the World Bank's ease of doing business index, rising from 140th in 2014 to 72nd in the latest report.
his result falls short of the 40th ranking Jokowi told OBG's delegation he was targeting in our September meeting, but still represents remarkable progress for a country that has historically had strong protectionist tendencies, stemming partly from lasting memories of resource exploitation under colonial rule.
What factors are driving positive changes in Indonesia's business environment? Alongside his flagship infrastructure programme, Jokowi's initiatives to create a more open economy and simplify business procedures have undoubtedly piqued the interest of international investors, and according to our survey, they are starting to satisfy the local business community as well.
Moves that have helped improve the business environment include the creation of a one-stop service at the Indonesia Investment Coordinating Board, the easing of foreign ownership restrictions in the government's negative investment list (DNI) - mainly in tourism, toll roads, retail, e-commerce and pharmaceuticals - and the increase in electricity generation capacity and reliability as part of the broader plan to add 35GW to the national grid during the Jokowie's first term, a target that is likely to be missed despite substantial progress.
These developments, among others, have translated into tangible, positive results. In the third quarter of 2017 foreign direct investment in Indonesia, excluding investment banking and oil and gas, reached a record high of Rp111.7 trillion ($8.4 billion), representing 12% year-on-year growth.
While the achievements so far deserve to be applauded, frequent changes to the DNI could foster uncertainty and instability. Furthermore, ongoing restrictions on foreign participation in key sectors - notably transport, health care and construction - and high local content requirements, such as those in smartphone and automotive manufacturing, are likely to weigh on international investor sentiment in the short to medium term.
The executives we met face-to-face for our survey were all too aware that Indonesia cannot afford to isolate its economy from global value chains if the government is to reach its target of 7% annual economic growth.
When asked about what external event could affect the Indonesian economy the most in the short to medium term, 38% of respondents cited demand growth from China, while 23% named trade protectionism.