Indonesia's Jokowi promises to make new labour and investment rules a reality

Mr Joko Widodo said planned changes to the labour law will apply to new employees, proposals he'll discuss with labour unions before taking them to parliament.
Mr Joko Widodo said planned changes to the labour law will apply to new employees, proposals he'll discuss with labour unions before taking them to parliament.PHOTO: REUTERS

JAKARTA (BLOOMBERG) - Indonesian President Joko Widodo said he will introduce sweeping changes to labour rules by the end of the year and open up more sectors of the economy to foreign investment, delivering on some of the major reforms investors have been demanding.

Mr Joko, more popularly known as Jokowi, said planned changes to the labour law will apply to new employees, proposals he will discuss with labour unions before taking them to parliament.

By restricting the rules to new jobs only, Mr Joko can attract businesses wanting to set up shop in Indonesia or looking to expand, while defusing opposition from labour groups.

Speaking from his home town of Solo in Central Java on Wednesday (Oct 2), Mr Joko told Bloomberg's editor-in-chief John Micklethwait that it's his "first priority" to reform the labour rules.

Businesses have long complained that generous severance packages, a complex minimum wage system and restrictions on hiring and firing workers make it difficult for them to expand operations.

"Every year there are three million new workers in the job market," Mr Joko said. "They must be given room to enter the job market.

"Second, we want to address investors' complaints. We have to revise the law and we hope that more investment will create competition among companies to get better workers."

Indonesia is trying to make up lost ground against regional peers vying for a slice of the business that's relocating out of China amid that nation's escalating trade war with the United States.

 
 
 

So far, smaller rivals like Vietnam are outperforming Indonesia, spurring Mr Joko to enact economic reforms that investors have long been pushing the authorities to make.

First, he will need to win over labour unions, which have already threatened protest action over possible changes to wage and health insurance regulations. On top of that, widespread student riots have broken out across the country against controversial changes to a crime Bill.

The protests are not derailing Mr Joko's reform plans as he prepares to officially begin his second five-year term later in October.

He is demanding ministers work harder and faster to remove the "handcuffs" restricting growth. And in addition to planned tax cuts and changes to labour laws, he wants foreign investment rules to be overhauled.

ECONOMIC ZONES

Indonesia restricts foreign investment in a number of industries from banking to brewing. A plan announced back in November last year to revise the limits and open up some sectors to as much as 100 per cent foreign ownership was delayed following a backlash from local businesses.

The President said on Wednesday that he will allow 100 per cent foreign ownership in sectors such as health and education in special economic zones.

He will also create an "apparel zone" in Central Java to build on the key export industry that already exists in the province, and allow 100 per cent foreign investment in the sector.

Relative to the size of its economy and population, Indonesia attracts little foreign direct investment.

In a recent World Bank document presented to Mr Joko, none of the 33 Chinese companies that announced plans to set up or expand production abroad between June and August chose Indonesia. They preferred locations such as Vietnam and Cambodia.

"We compete against other countries in attracting investment, to create jobs," he said. The two main complaints he hears from investors are regarding employment in labour-intensive industries and licensing rules, he said.

"We will work on these two as soon as possible."

The President said he will retain Ms Sri Mulyani Indrawati, currently finance minister, in his Cabinet, though he declined to say what role she would take.

A former World Bank managing director, Ms Sri Mulyani has been spearheading efforts to boost tax revenue and keep the budget deficit under control.

 
 
 

Mr Joko is keen to shore up the economy as global risks rise and the trade war wreaks havoc in the region. Growth has been stuck around 5 per cent for most of his first term. The government has twice already revised its growth projections for this year lower, seeing expansion of 5.08 per cent now, compared with an initial 5.3 per cent. The economy is projected to grow 5.3 per cent next year.

Exports have been sliding, contracting for a 10th month in a row in August, and the current account deficit, at 3 per cent of gross domestic product, remains a key vulnerability for the economy.

Other economic variables are doing better. Inflation remains well within the central bank's target range of 2.5 per cent to 4.5 per cent, while the jobless rate is at a more than two-decade low. The currency has gained 1.4 per cent against the dollar this year, one of the stronger performers in Asia in 2019.

Mr Joko said the government would like to see lower interest rates in the economy, though emphasising that the central bank conducts monetary policy independently. Bank Indonesia has cut rates three times this year by a total of 75 basis points, rolling back some of last year's policy tightening.

"Government will not intervene, but I think if rates could fall, it would be good for the real sector," he said. "They know when to raise or to cut rate."