Asia-Pacific News

Is Indonesia finally getting serious about boosting FDI?

Getty Images

Indonesia's President Joko Widodo is hoping to attract much-needed foreign capital through measures such as a new tax holiday scheme and plans for a "massive deregulation" of key industries. But will they be enough to lure tetchy foreign investors?

Late Wednesday, the government promised quick and wide-sweeping deregulation in manufacturing, trade and agriculture in a bid to brighten the climate for investors.

This followed an announcement last week that new companies with a minimum investment of 1 trillion rupiah ($71 million) in "pioneer" industries— including energy, telecommunications, maritime transport and agricultural processing — would receive tax cuts of between 10 percent and 100 percent for up to 15 years. Pioneer industries were defined as those with strategic value for the national economy.

Indonesia watchers say while the measures are a step in the right direction, they are likely insufficient to attract significant investment inflows, particularly as the country's macroeconomic outlook continues to soften.

Southeast Asia's largest economy, grappling with falling commodity prices and a swooning currency, is expected to grow 5 percent this year - its slowest pace since 2009.

Rajiv Biswas, Asia-Pacific chief economist at IHS notes the latest measures need to be accompanied by more large-scale reforms to boost the country's infrastructure, for example, in order to be effective.

Read MoreIndonesian President Widodo replaces key economic ministers

"The new reforms planned by the Jokowi administration are important positive steps, but boosting Indonesian competitiveness will require wide-ranging economic reforms," Biswas said. Jokowi is the nickname widely used for President Widodo.

"A key reform needed is substantially upgrading infrastructure such as ports, roads and electricity, with the Jokowi administration having struggled to implement planned public infrastructure spending targets set out in the government's first budget," he said.

Reflecting such bottlenecks, Indonesia ranked at only 114 out of 189 countries in the World Bank's Ease of Doing Business index for 2015.

"There are tremendous hurdles to overcome, so the task of deregulation will be very challenging to implement," Biswas added.

Daniel Martin, senior Asia economist at Capital Economics echoed this sentiment.

"Tax cuts on their own won't be enough to lure investment. The other big drawbacks of the business environment, such as high transport costs, corruption, and a rigid labor market, will all remain deterrents," Martin said.

"That said, significant efforts to reduce red tape, if the president is serious about them, would be a big step in the right direction and might signal a willingness to increase efforts to address other problems," he added.

Why China wants to build Indonesia's high-speed rail

Since taking office in October 2014, President Widodo has struggled to push through hard-hitting reforms needed to revive the economy, disappointing investors and voters who had high hopes he would turn the economy around.

As a result, he has been stepping up efforts to reverse public perceptions. Last month, for example, he replaced two key economic ministers and installed two experienced technocrats who are expected to improve policy coordination and dispel concerns that Indonesia is taking a protectionist turn to shield its economy.

To be sure, not all analysts read into the latest measures with skepticism.

Wai Ho Leong, economist at Barclays believes they are sending "two clear signals": "One is that Indonesia is ready for more foreign investment and the second is that it will become more investor friendly."

"The recent progress made in Batang over a stalled power plant project is the strongest signal that Jokowi can make things happen and that the infrastructure push is going ahead," he added.

In April, the government announced it would start the construction of a coal-fired power plant in Batang, Central Java – the first to be built through a public-private partnership - which had been put on hold because land for the project was in dispute, according to the Jakarta Post. To settle the land issue, the government invoked the 2012 Land Acquisition Law, which enables land procurement in the name of public interest, it said.

-Reuters contributed to this report