The Indonesian capital, Jakarta, has been in tumult the last 10 days after the passage of a controversial, wide-spanning bill. The net effect, though, of the passage of the Omnibus Law is to make the world's fourth-most populous nation far more attractive to investors.
The Omnibus Law finally passed on October 5, following years of debate. The net conclusion of an almost 1,000-page bill "is the recognition of a dire need to urgently transform, or risk being left behind in the race to attract investments," notes Tushar Mohata with the Indonesia research team at Nomura.
The law streamlines approvals for mergers and acquisitions. Low- and medium-risk businesses no longer require permits for purchase; only "high-risk" businesses in sectors such as health, safety, the environment and natural resources (with commodities a large part of the Indonesian economy) require special permission.
The central government is also taking command, led by reform-minded President Joko Widodo, universally known as Jokowi. He is the first Indonesian leader post-independence who has not come from the military or political elite. The heavy-metal loving former governor of Jakarta, who began working in his father's furniture workshop at the age of 12, is a secularist who has done his best to separate religion from governance in the world's largest majority-Muslim nation.
This will be one of Jokowi's signature achievements in this his last term. It amends 79 laws and eliminates thousands of regulations that have deterred international investment. It also saves a decade's worth of political bickering over the revision of numerous laws and regulations, in the eyes of Société Générale economist Kunal Kundu.
"In one fell swoop, the newly passed bill should be able to remove bureaucratic inefficiencies and excessive licensing requirements as well as the opaque, overlapping and contradictory regulations that have long hindered the country's competitiveness," Kundu states.
The national government will now be able to seize control of any prolonged approvals process for investments at the local level. If the local government dilly-dallies, the central government can step in after three months to speed things along.
The most-contentious issues, ones that have brought thousands of protestors out onto the streets, surround labor laws and the minimum wage. Overseas companies have been loath to invest in Indonesia due to onerous issues surrounding hiring and firing, where necessary.
That is now far easier. Severance for workers has been slashed by an average of 46% across the board, to a maximum of 19 months compared with the previous total of 32 months. The government will set up an insurance fund to cover up to six months of wages, with provisions to retrain workers. The minimum wage will be adjusted based on economic growth and inflation, including regional variations.
For non-Indonesians, there is a major change in the way property can be held, an issue I flagged in August. Foreigners can now buy apartments worth more than 3 billion rupiah (US$212,000) if they have a work permit.
The law has not wrapped up neatly some contradictions in prior legislation over the ability of foreigners to buy condos. But Mohata at Nomura believes there's enough legal teeth in the new law for overseas buyers to make an apartment purchase with confidence.
Nomura is watching for gains in the shares of property developers as a result. The Japanese brokerage's order of preference starts with BSD City JK:BSDE (with an ADR under BSPDY), Ciputra Development JK:CTRA, Pakuwon Jati JK:PWON and Summarecon Agung JK:SMRA.
The developers should all see a short-term share boost, which would be bigger for the developers with higher-end portfolios. Although third-favorite, Pakuwon Jati has room for improvement there, Nomura believes, since it has a limited inventory of higher-priced pads.
The Indonesian stock market has been one of Asia's worst performers so far this year. The benchmark Jakarta Stock Exchange Composite Index is down 17.8% year to date, although it has rallied 6.3% so far this month with the passage of the new law.
Another major change enabled by the law is that Indonesia will form its first sovereign wealth fund. The government will provide all the initial US$5 billion in funding, with the aim of tripling its investment to US$15 billion in the coming years. Much of the money will be invested in much-needed infrastructure spanning the world's largest archipelago, with more than 17,000 islands.
The shares of construction contractors are also worth watching as a result. Chief among those are Wijaya Karya JK:WIKA, which has a relatively strong balance sheet for new construction capacity, as well as the cement companies Semen Indonesia JK:SMGR (with an ADR under PSGTY) and Indocement Tunggal Prakarsa JK:INTP (with an ADR under PITPY).
Now that the Omnibus Law has passed, it must be put into effect. It has more than 40 regulations that must be put into place within three months.
"We believe this has the potential to truly change the investment climate in the future for Indonesia," Mohata at Nomura concludes.