Changes to Capital Minimums/Moody's Upgrades Indonesia

Background: An inquiry from a member currently in Indonesia exploring a joint venture revealed that the effective minimum capital requirements have recently jumped from $100,000 to $1 million (10 billion rupiah).

The Investment Coordinating Board (BKPM) is now interpreting the 2008 Law on SME’s (micro, small and medium enterprises) to classify any foreign investment as “large scale” and is applying a minimum of $1 million (US dollars) for initial capital. This is apparently occurring somewhat at the request of the SME Ministry. According to my sources, BKPM is unlikely to make public reference to this new minimum as its own Investment Law of 2007 makes no mention of investment minimums and gives “national treatment” status to a joint venture company (PMA), putting it on par with local companies (PMDN). It has begun to communicate the new minimum in private.

AICC has confirmed this directly with the current Chairman of BKPM, Gita Wirjawan (concurrently Minister of Trade), who said he lobbied for a lower cap when the law was proposed.

Comment:
AICC considers this an unfortunate development. In these difficult economic times some of the best emerging opportunities for US-Indonesia business collaborations are likely to start as small joint venture businesses.

For more details on this this issue as well as read a brief report on AICC's December 18-23 Congressional Staff Visit to Indonesia click here.


Moody's Upgrades Indonesia to Investment Grade

Moody’s Investors Service has today (January 18, 2012) upgraded Republic of Indonesia’s foreign and local-currency bond ratings to Baa3 with stable outlook. In the press release today, Moody's stated the key factors supporting this action were (1) Moody’s anticipation that government financial metrics will remain in line with Baa peers (2) The demonstrated resilience of Indonesia’s economic growth to large external shocks (3) The presence of policy buffers and tools that address financial vulnerabilities and (4) A healthier banking system capable of withstanding stress.

According to Christian de Gusman, Moody's Lead Analyst for Indonesia mentioned in the press release rationale for the upgrade is Indonesia’s cyclical resilience to large external shocks points to sustainably high trend growth over the medium term. Robust growth has been accompanied by the continued health of its external payments position, supported by increasingly large flows of foreign direct investment, while inflationary expectations are becoming better anchored at a more stable and historically lower level.

"Having the Investment Grade from two Major Rating Agencies (Fitch and Moody’s) shows that Indonesia is gaining stronger acknowledgment due to its strong economic performance, amidst highly uncertain condition in the global economy. I believe, Indonesia could achieve a better performance in 2012", says Darmin Nasution, Bank Indonesia Governor.

2011 Review

By most measures, Indonesia had a banner year. Continuing 6%+ economic growth leading to at least one investment grade sovereign rating (Fitch) and strong performances in world forums (APEC, G20, World Economic Forum, ASEAN Summit, East Asia Summit) characterized 2011. Fears of inflation going into the year never materialized and the rupiah began and ended the year near 9200 with very little volatility. Consumer demand continued to be the major engine of growth and as in 2010, the lack of new infrastructure and slow downs in the US and EU were the main constraints. Indonesia’s growing middle class achieved more attention through record sales of cars and motorcycles and huge orders for Boeing 737‘s by a local private airline. Indonesia’s central bank added just enough fuel with a 50 basis points drop to 6%. Its major stock market was the only major emerging market to experience real gains (3.2%) while the overall leading emerging market index fell 20%. Coal led commodity exports as well as mining investment but lingering uncertainty in oil/gas and hard rock mining(gold, copper, etc.) over contracts and recovery issues kept the sector underperforming as a whole and starved for significant new investment. Politically, 2011 saw the early emergence of challengers to the Presidency with Aburizal Bakrie(Chairman of Golkar), Prabowo (son-in-law of Suharto), and Hatta Rajasa (Coordinating Minister for Economic Affairs) all but formally announcing their candidacy. President SBY’s Democrat Party stumbled over corruption allegations of several senior officials. SBY’s approval ratings fell precipitously during the year.

US-Indonesia relations were boosted by several high profile events (APEC in Hawaii, G20, and East Asia Summit in Bali) at which Obama and SBY met as well as many other activities under the umbrella of the Comprehensive Partnership. OPIC (Overseas Private Investment Corporation)acknowledged Indonesia’s rising star status by hosting a regional conference in May in Jakarta, and the US State Department’s entrepreneurship initiative brought several leading US venture capitalists to judge Indonesian talent. Indonesia’s ambassador to the US, Dino Patti Djalal, and BKPM Chairman, Gita Wirjawan, were very active in cementing ties through innovative investment and cultural events: an investment forum in DC featured 4 provincial governors, Indonesia hosted a batik design competition for Americans, and Ambassador Djalal gathered over 5,000 on the Washington Mall to set a world record for number of people playing the angklung, an Indonesian musical instrument (officially acknowledged by Guinness Book of World Records). Although US companies operating in Indonesia continued to have their share of difficulties (centered primarily on tax, contract, regulatory ambiguity, and rule of law issues) and lack of infrastructure is a major constraint, most reported good earnings and several sizable direct investments were announced (Proctor & Gamble, GM, Chrysler). Boeing won its largest order ($20 billion) in its history from Indonesian-owned Lion Air. Indonesian products in the US continue to have good demand but its paper products are being hampered by NGO boycott campaigns. After shifting his Cabinet in the third quarter, the SBY government finally pushed through an important new law on land acquisition and announced modifications to its fuel subsidy policy that bodes well for the future. Ongoing corruption cases and rising religious intolerance marred an otherwise strong governmental performance.