Indonesia

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Indonesia Heads Toward Major Involvement in Solar Power Export

Indonesia is on course to become a major solar power exporter. In 2021, the government rolled out two important regulations, showcasing strong incentives for investment in renewable energy. Its neighboring country, Singapore, signed two agreements on the same day to import solar energy from Indonesia. A recent finding by the Australian National University reveals that, by 2050, Indonesia’s Solar PV could reach 190,000 TWh, far larger than the nation’s total demand.

 

Solar farm in Bali, indonesia

Long-awaited Boost by the Government in the Renewable Energy Sector

So far in 2021, the Indonesian government has issued two important regulations, the energy ministry’s Regulation No. 26/2021, addressing the use of rooftop solar power systems, and the Electricity Procurement Plan (RUPTL) for 2021-2030. The two regulations are expected to support the aim of a 23 percent share of renewable energy in the country’s energy mix by 2025.

Energy ministry Regulation No. 26 amended the previous 2018 solar rooftop regulation with one notable point. Independent power producers (IPPs) that signed power purchase agreements (PPAs) with the state-owned power company PLN will now be able to export 100 percent (instead of 65 percent) of the electricity generated by rooftop solar panels. While the regulation is still under debate, it would undeniably improve the investment appeal in solar rooftop systems.

Moreover, the RUPTL 2021-2030, released by PLN, sets a target for renewable energy to account for 51.6 percent of the national energy mix by 2030, a significant increase from the 30 percent target set out in the RUPTL released in 2019. PLN plans to build 40.6 GW-worth of new power plants through 2030, 20.9 GW of which would be from renewable resources. Hydropower would account for around half of the new renewable energy resources, solar for 4.7 GW, and geothermal for 3.35 GW.

Graph showing share of new power plants to be built by 2030

PLN’s plan aligns with the government’s zero-carbon pledge by 2060. The coal-dominated power sector is one of the largest contributors to Indonesia’s carbon emissions. Indonesia’s long dependence on coal power plants has been more precarious lately as China, a major investor in Indonesian coal power plants, pledged to halt investment in coal power abroad.

The largest economy in the region, Indonesia has been lagging in renewable energy production. Slowed drafting of supportive regulations, coupled with the nature of the business requiring high initial costs and low return on investment, made investment in renewable energy unattractive. On average, the Indonesian installed capacity of renewable energy has only grown by 4 percent since 2012, compared to more than 10 percent in Malaysia, Singapore, Vietnam and Thailand.

Graph showing Indonesia's renewable energy installed capacity

Several further steps need to be taken to achieve the government’s ambitious goals, including the finalization of the renewable energy laws and presidential regulations on the mechanism for renewable energy pricing and procurement. Additionally, an optimum energy transition roadmap is required to strike a balance between environmental conservation and sufficient energy supply.

Major Cross-Border Solar Power Projects

Multiple promising solar power projects were recently announced by the government, including exporting deals with Singapore and Southeast Asia’s largest floating solar power project with United Arab Emirates. The projects, as interpreted by experts, are signals of an export-intensive strategy in which local and international companies seek to export green energy from Indonesia to its neighbors.

Two Joint Development Agreements (JDAs) were signed on October 25, 2021 by Singaporean companies for the import of solar energy from Indonesia. One was signed by Singapore’s Sembcorp Industries, which announced that the joint development plan would include the development of a large-scale integrated solar and energy storage in Indonesia’s Batam, Bintan, and Karimun (BBK) region. Another JDA, signed by PacificLight Power (PLP) – a Singaporean-based power retail company, and a consortium of Indonesian power companies, was for a 100MW pilot solar export project from Indonesia to Singapore. The JDAs were signed after Singaporean Minister for Trade and Industry announced Singapore’s plan to import around 30 percent of its electricity from low-carbon sources by 2035.

Previously, Indonesia began work on a 145 MW floating solar power project, the largest in Southeast Asia, on August 3, 2021, after a financing agreement between PLN and Masdar of United Arab Emirates. The project is scheduled to begin commercial operation in November 2022. A similar plan will also be developed in eight other reservoirs in Java and Sumatra.

Vast Potential in Indonesia’s Solar Energy Sector

A recent study published by the 100% Renewable Energy team at the Australian National University (ANU) outlined Indonesia’s potential in solar energy far larger than any other energy sources combined, and much higher than needed nationally.

Graph showing Indonesia's solar energy potential

The research team forecasts that Indonesia could harvest 10 billion solar panels by 2050. The panels could be distributed across the archipelago, from rooftops, abandoned coal mine sites and agriculture sites, to floating on the country’s inland sea, lakes, and reservoirs.

Chart showing Indonesia's solar energy potential by region

The Indonesian Ministry of Energy and Mineral Resources reported a total of 154 MW of installed solar panels as of 2020. That is far below Vietnam (16,500 MW) and even less than Singapore (377 MW). However, the new improvements in regulations and the influx of solar projects could significantly change the Indonesian current standing.

Indonesia has tremendous opportunities to become a major exporter of solar power. The latest regulations signify the government’s focus on the sector, which helps boost solar investment interest. The newly signed projects with Singapore also prove Indonesia’s prospect in selling its vast solar power potential to neighboring countries.


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    by Asia Perspective Asia Perspective No Comments

    Southeast Asia’s Improved COVID Situation Offers a Positive Outlook For Economy Rebound

    With intensive vaccine rollout and heavy restrictions, Southeast Asia has significantly improved its COVID situation towards the end of 2021. Regional governments are gradually lifting restrictions and pushing to reopen, aiming to strike a balance between virus containment and movement of people and money.

     

    Tourists in Bangkok, Thailand

    Southeast Asia’s COVID Cases

    Southeast Asia’s top economies – Vietnam, Indonesia, the Philippines, Malaysia, and Thailand, all faced a surge in COVID cases during the summer of 2021. The number of COVID-infected citizens soared in Indonesia during June-July, making it the country with the highest rate of infections in the region. Vietnam, originally successful in preventing the disease, also suffered a severe outbreak from June of 2021.

    Table showing number of confirmed COVID cases in Southeast Asia

    With heavy restrictions in place, the rate of daily new COVID cases has decreased for most countries. Indonesia, once the pandemic centre of Southeast Asia, reported the lowest number of daily new cases among the top economies. Except for Thailand, other countries have reduced their daily record of infections to less than 5,000 cases.

    Graph showing daily ne confirmed cases in Southeast Asia

    Southeast Asia’s COVID Vaccination Progress

    Making up for a slow beginning, Vietnam and Indonesia are speeding up their vaccination program with over 1 million doses administered daily in October. Thailand and the Philippines are lagging in the race, with around 5 to 6 thousand doses administered daily. Only Malaysia has fully vaccinated over 70% of its population.

    Table showing vaccinations in Southeast Asia

    All countries target to achieve herd immunity with at least 70% of the population fully vaccinated against COVID-19. There are several complications in reaching these deadlines. For example, shortage of doses, government and localities coordination and local anti-vaccine movement (particularly in the Philippines and Indonesia), just to name a few.

    Vietnam and Indonesia both aim to achieve herd immunity by March 2022. The Philippines is set to immunize 60% of its population by the end of 2021. Malaysia has surpassed the 70% benchmark and plans to vaccinate 80% of its target population (adults aged 18 and over) by December 2021. Thailand aims to vaccinate 70% of its population within 2021, focusing on covering tourist-concentrated areas.

    Countries are also introducing vaccination programs to children ahead of the new school year. In October 2021, the Philippines began a pilot program in hospitals to vaccinate minors aged 12 to 17 with underlying medical conditions. Thailand recently kicked off a vaccination program with the Pfizer vaccine, aiming for more than 5.04 million students, aged 12 to 18. Vietnam will also start vaccinating children aged 12 to 17 with the Pfizer-BioNTech vaccine, starting November 2021.

    Future Outlook: GDP, FDI, Supply Chains, and Tourism

    The surge in infected cases led several governments to apply COVID-zero strategies, including limited international and local movements, and halted business activities. Unsurprisingly, strict regulations carried a negative impact on the economy. After months of heavy restrictions that put the economy on the brink, countries in Southeast Asia have lifted several social curbs and, most importantly, planned to reopen.

    According to Oxford Economics, Foreign Direct Investment (FDI) flowing into Southeast Asia remains strong. As the global value chains continue to adjust to higher labour costs and trade protectionism in China, Southeast Asia is likely to be the key beneficiary. London-based think tank Capital Economics projected the region’s economy to rebound strongly in the fourth quarter of 2021 as COVID cases have dramatically reduced.

    Vietnam

    Vietnam’s GDP declined sharply by 6.17% in Quarter 3 of 2021 – the first recorded negative growth since 2000. In the first nine months of the year, the country’s GDP has now only grown by 1.42%. The Ministry of Planning and Investment estimates the annual GDP growth of 2021 to be at 3-3.5% compared to 2.91% in the previous year.

    Foreign investors remain optimistic about Vietnam’s long-term growth. Its role in the global supply chain is only expected to grow, as noted by American Chamber of Commerce in Vietnam. Information services company IHS Market also stated that Vietnam’s involvement in the global supply chains would not be diminished by the pandemic, since the costs to relocate would outweigh the costs of momentary disruptions.

    The government is developing a roadmap to be fully open to international tourists by June 2022. A pilot program for fully vaccinated international visitors to Phu Quoc Island will be carried out in November 2021, before reopening Nha Trang, Ha Long, Hoi An, and Dalat in December.

    Indonesia

    Indonesia, Southeast Asia’s largest economy, is expected to grow by 4.5% in the third quarter of 2021, much lower than the 7.07% growth of the second quarter. Indonesia’s finance minister stated that domestic demand had improved since the second week of August as restrictions relaxed. Exports from Indonesia, the world’s largest exporter of thermal coal and palm oil, also spiked as prices reached a record high. The new official forecast for the annual GDP in 2021 is at 4%.

    The Indonesian Investment Ministry disclosed that the rate of foreign investment in Indonesia in the third quarter of 2021 decreased by 2.8% quarter-to-quarter, but increased by 3.7% year-on-year (YoY). With 13% of total foreign investment, the housing sector, industrial estates, and offices received the most attention. The transportation, warehouse, and telecommunications sectors received around 12.3%. The government is targeting 900 trillion rupiahs in total investment in 2021. By September, Indonesia has reached 73.3% of the target.

    Indonesia is bracing itself for the year-end holidays, as nearly 20 million people are forecasted to travel to Java and Bali. The government has implemented several protocols for reopening tourist sites and hospitality services.

    Philippines

    Capital Economics projected an uptick in the Philippines’ GDP in the third quarter of 2021 from the second one. The second-quarter GDP was equivalent to an 11.8% growth YoY. Capital Economics also expects the fourth-quarter GDP to grow by over 4% compared to the third-quarter result and the annual GDP to grow 4.5% in 2021. The government set a target of 4-5% growth this year.

    In the first half of 2021, FDIs to the Philippines amounted to US$4.3 billion, a 40.7% increase from the previous year’s level. The approved foreign investment reached a 45.5% increase YoY in the second quarter. The major investors to the Philippines in the quarter include the United Kingdom, which accounted for 55.6% of the total approved foreign investments, followed by South Korea (10%) and the United States (9.5%). 55.7% of the total foreign investment pledges are in the Information and Communication Industry (ICT). Construction came in second with a 16.1% share of total foreign investment commitments, while manufacturing came third with a 10.1% share.

    The Philippines currently permits fully vaccinated international travellers from low-risk areas to arrive without quarantine. Most businesses in Metro Manila are allowed to operate at full capacity, while casinos, bars, and indoor tourist attractions can reopen at 30% capacity.

    Malaysia

    According to the Malaysian Institute of Economic Research (MIER), Malaysia’s economy is on the path of a V-shaped recovery. The GDP growth for 2021 is projected to be at 4.0%, slightly less than the average 4.9% growth of the pre-COVID period. Considering the improved COVID situation in Malaysia, Fitch Solutions has also revised the GDP growth forecast for Malaysia from 0.0% to 1.5% in 2021. Fitch Solutions’ forecast for 2022 remains at 5.5% growth in GDP.

    In the first half of 2021, FDIs in Malaysia surged 223.1% YoY amid the pandemic, as stated by Malaysian International Trade and Industry Minister. FDI and domestic direct investment (DDI) have played a significant part in growing the company. FDI inflows in Malaysia targeted the manufacturing sector, which accounts for 79.9% of the total investment flow in the second quarter of 2021.

    Archipelago Langkawi has reopened in October 2021 as part of the government’s Tourism Recovery Plan; however, the destination is only available for vaccinated domestic visitors.  The government plans to welcome domestic visitors to Tioman Island, Johor, Melaka, and the state of Sabah on the island of Borneo. International travelers will be welcomed after inter-state travel and tourism are running run smoothly.

    Thailand

    Thailand’s economy is set to grow at a slower pace than previously expected. The Finance Ministry lowered its forecast to 1% growth in annual GDP, from 1.3% predicted in July. The ministry expects the economy to have declined by 3.5% YoY in the third quarter. As a reopening plan is rolling, the ministry forecasts a 3% growth YoY in the fourth-quarter GDP. Thailand’s trade performance was higher than expected, with a 17.1% growth in exports YoY for the first three quarters of 2021.

    In the January-September period, Thailand’s investment pledges climbed to a 140% growth from the year before. Japan, the United States, and China were the top three sources of FDI applications. Industries that saw significant inflows of foreign investments include electrical and electronics, medical and chemical sectors.

    With tourism representing 18% of its GDP, Thailand has been the most eager country to reopen its doors to international travelers. Since the last week of October 2021, Thailand has welcomed vaccinated travelers from more than 40 countries. Beginning November 1, travelers from 6 more countries and territories that Thailand considers “low risk” will be able to enter without quarantine. The government anticipates 1 million tourists to enter Thailand by March 2022.

    After a long battle with the pandemic surge, Southeast Asia has been able to relax its stringent social restrictions. The intensive vaccination programs have played an important role in curbing the daily infection rates. While the road to rebound to pre-pandemic levels might have prolonged, the region’s top economies have made multiple measures to balance its pandemic control and economic recovery. The short-term disruption in supply chains did not diminish Southeast Asia’s growing importance in the global supply chains, as foreign investors are still keen to enter the region.


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      by Asia Perspective Asia Perspective No Comments

      Indonesia Extends Luxury Tax Break for Small-Car Sales

      In an attempt to restore the nation’s economy amid the pandemic, the Indonesian government extended its luxury tax break for sales of small cars, first enacted in March 2021, until year-end. The incentive has paved the way for the industry’s impressive recovery. However, challenges remain.

       

      Indonesian woman driving a car

       

      Indonesia, the second largest automobile manufacturing nation in Southeast Asia, faced a severe decrease in both demand and supply for cars due to COVID-19. From nearly 1.3 million cars produced in 2019, the country halved its production to around 690 thousand cars in 2020. Reduced consumer demand and halted production due to movement restrictions tied back Indonesian car sales until February 2021.

      Luxury Goods Tax Relief Enabled Recovery of the Automotive Industry

      The Indonesian government imposes a luxury goods tax (Indonesian: Pajak Penjualan atas Barang Mewah (PPnBM)) on vehicles based on engine displacement and body type. With an exemption of low-cost and energy-efficient cars, such as Toyota Agya or Honda Brio Satya, automobile sales are charged 10-125% of tax percentage.

      The PPnBM was first relieved in early March 2021 for sales of new cars with an engine capacity of less than 1,500 cc. The incentive targets the automotive sector and related industries, which contributed 10.16% of the country’s GDP and employed more than 1.5 million people in 2018.

      The original plan stated a 100% government support of the tax payment from March to May, 50% from June to August, and 25% from September to November. In June, the government extended the relief to fully bear the tax on sales of small cars until August and half of the tax on new purchases made from September to December. The latest extension of the tax relief, announced in September, will be in place until the year-end. The government also allowed a 25%-50% tax discount for cars of more than 1,500cc to 2,500cc capacity.

      Since the initial implementation of the policy, sales in March rose to 84,910 units, marking a growth of 73% month-on-month (MoM) and 10.5% year-on-year (YoY). This remarkable jump slightly dwindled throughout the second and third quarter. However, YoY growth was sustained at a high level, significantly at 1443.6% in May.Graph showing Indonesia automotive sales

      In August, the Indonesian automobile manufacturers association (GAIKINDO) reported total national car sales of 83,819 units, reaching close to the country’s pre-pandemic level of monthly sales volume. Cumulatively from January-August 2021, retail car sales reached a total of 545,424 units, equivalent to a 68% growth compared to last year, signifying a positive consumer response to the tax incentive.

      Expansive Production Meets Domestic Demand and Exports

      The jump in demands allowed car production to increase in the same manner. Despite increased movement restrictions from May due to a surge in COVID cases, the production results showed positive YoY growth. As the country managed to subdue its infection rates from August, a strong bounce back in production was visible in the month’s production result. Production from January-August marked a 65.8% increase YoY.

      Graph showing Indonesia automotive production

      From January-August 2021, the 4×2 passenger cars production benefit heavily from the tax incentive, recording a 70.4% YoY growth compared to 2020. Meanwhile, the production of 4×4 passenger cars, which receives a 25% discount in PPnBM, has not been equally fruitful. However, comparing with August 2020, 4×4 production in August 2021 has shown a significant increase YoY.

      Indonesian Automotive production comparison chart

      There’s also a noticeable growth of 64.3% in the Affordable Energy Saving Cars 4×2 category, originally already free from the luxury tax. As the government push for more environmental-friendly solutions in the domestic automotive industry, Energy Saving Cars are expected to meet with elevated demand in the near future.

      Challenges Remain on the Road to Recovery

      Automotive sales during the last quarter of the year have been historically the most lucrative. With generous governmental support, the industry could expect to reach 1 million units in production and 800 thousand in sales. However, there are challenges to surpass in order to realise this potential.

      Since its introduction in March 2021, the tax incentive has helped boosted domestic car purchases, with its subsequent extensions considered to have further accelerated the recovery of the automotive industry. The industry welcomes positive projections toward the end of 2021. However, the current global pandemic and semiconductor shortage may challenge the nation on its road to recovery.


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        by Asia Perspective Asia Perspective No Comments

        Indonesia Releases Draft of New Prioritized Investment List

        In January 2021, Indonesia’s government drafted a new investment target list, aiming to boost investments in certain industries.

         

        Jakarta city view

         

        The existing list, released in 2016, categorizes industries into three levels. Those that are open to investment (priority list), those that are closed to investment and lastly those who are open, but with regulations. Under the new list, Indonesia have added one additional type of investment level, which requires a partnership with an Indonesian SME. Further, the new list loses the investment requirement as more industries are put into the prioritized category. Therefore, Indonesia is bumping up the incentives for foreign investments to Indonesia, as there is less restrictions and required conditions.

        For a business field to be defined as a ‘prioritized’, it must meet the following criteria:

        Criteria for Indonesia prioritized businesses

        Investments into business sectors that are periodized are eligible for both fiscal and non-fiscal incentives. Fiscal incentives include (amongst others) tax holidays, allowances and import duty exemptions, while non-fiscal incentives include (amongst others) ease of attaining business licenses and work permits. As a result of the lucrative incentives, more high-tech and innovative investments to Indonesia could improve the competitiveness of Indonesia’s position on the global market. Further, as the list prioritize labour-intensive investments, there is a great opportunity for foreign investors looking for cheaper labour costs within the manufacturing sector.

        In conclusion, Indonesia’s new list aims to attract more foreign investments to the country. With bigger foreign capital flow into Indonesia, the employment rate and economic performance will be improved. In addition, high-tech and innovation investment might scale up Indonesia’s production output across different industries in the longer perspective. For foreign investors, the updated investment list provides them with substantial opportunities under a more friendly and stable investment environment. As a result, this could be a win-win outcome for both Indonesia and foreign businesses.


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          Asia-Pacific Nations Form World’s Largest Trading Pact

          After eight years of negotiation, 15 nations formally signed one of the world’s largest free trade agreements on the 15th of November 2020. The Regional Comprehensive Economic Partnership (RCEP) includes the 10 ASEAN nations as well as their close partners China, Japan, South Korea, New Zealand and Australia. The agreement stands as a symbol of China’s growing economic impact in Southeast Asia, at a time when the US places itself in an uncertain position in the region.

           

          RCEP map

           

          The RCEP shows that the world won’t wait around for the US, but instead engage in aggressive trade negotiations without it. The European Union are currently pursuing several free trade agreements at a high pace. As a result, many American exporters might lose their global market shares.

          The RCEP is expected to abolish a range of tariffs on imports over a 20-year period. It also includes regulations on intellectual property, telecommunications, financial services, e-commerce, and professional services. However, as the new trade agreement eliminates tariffs mainly on goods that are already eligible for duty-free treatment, it is expected to formalize, rather than remake, the business among the involved nations. Moreover, the pact introduces so-called “rules of origin”, which will set common standard for how much of a product needs to be produced within the region to qualify for duty-free treatment. As an effect, international enterprises will have an easier task of setting up cross-border supply chains that span several countries.

          Due to the ongoing global pandemic, the signing of the free trade agreement was a bit unusual as The whole process was conducted virtually. Each country’s trade minister took turn signing the deal, while his or her head of state or government stood nearby and watched the signing take place.

          The agreement is the biggest of its kind in relation to the massive population it affects. The pact covers 2,2 billion people, more than any previous free trade agreement has ever covered. Moreover, the deal could increase global national income by 186 billion USD annually by 2030. It is believed that the pact will benefit China, Japan and South Korea the most.


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            by Asia Perspective Asia Perspective No Comments

            Indonesia Kicks Off National Food Project to Tackle Possible Crisis

            Indonesia’s government kicks of its national food program aiming to relieve the country’s reliance on food imports and deal with a possible global food crisis caused by the COVID-19 pandemic.

            Indonesian rice farmer

             

            Indonesia has long been one of the top global importers of wheat and rice. In 2018, the country imported approximately 10.1 million tons of wheat which made it the biggest wheat importer globally. Moreover, Indonesia ranked second in rice imports, only after China, with 1.85 million tons. Although Indonesia’s rice production is among the top 3 worldwide, the domestic supply cannot meet the demand of this fourth largest populous country with a high rice consumption per capita. Hence, Indonesia needs to import large quantities of rice every year, mainly from Thailand and Vietnam.

             

            Graph showing biggest wheat importers 2018

            Graph showing biggest milled rice importers 2018

            Last year, the Food and Agriculture Organization of the United Nations warned about high food insecurities due to conflicts, climate change and economic turbulence. Now, the spread of the COVID-19 virus have accelerated the negative outlook of food shortage due to disrupted food supply chains, decreased purchasing power, reduction in production and distribution capacity. Therefore, in this context, the fact that Indonesia relies on food import makes the country more exposed to a food shortage risk.

            Considering the above jeopardies together with the goal to be rice self-sufficient, the Indonesian government decided to run a food project to grow rice, corn and other staple crops to secure food reserves for the upcoming years. In the first stage, the project is expected to cover an area of 770,000 hectares among which 148,000 hectares is for rice and 622,000 hectares is for other crops, such as corn and cassava. By the end of 2025, the food project will be expanded to cover a total of 1.4 million hectares throughout the many islands of Indonesia. Planting is planned to start by the end of 2020.

            The government aims to make Indonesia an agricultural center with developed technology and a skilled labor force. Rice fields will be enlarged, and agricultural production will grow. Indonesia hopes the project will help ensure national food stockpiles and drive the development of the agricultural industry of Indonesia. However, experts have expressed concerns that this project needs thorough environmental studies in order to foster those positive effects without damaging the environment, because the project will be developed on degraded peatlands which may cause flooding and forest fire in the longer run.

            In conclusion, being food self-sufficient has long been a priority for the Indonesian government. The development towards it has been accelerated by the COVID-19 pandemic, as it has paralyzed the economic and social sectors in various countries, and threatened food availability worldwide. Therefore, the food security project is believed to fulfill the national food reserves in the future as well as develop the food production of the country, but possible environmental impacts need to be considered to ensure sustainability of the development.


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              Countries in Southeast Asia impose VAT on cross-border e-services

              Singapore and Malaysia were the first countries in Southeast Asia to levy value-added-tax (VAT) on digital services provided by non-residents to consumers. In May 2020, Indonesia introduced a 10% VAT on digital service providers. Following that, the Philippines and Vietnam also set plans for imposing this type of VAT in their countries, starting from 1st of January 2021.

               

              Man using a credit card to shop online

               

              International digital businesses have long been able to monetize their customers from any country across the globe without being physically present in those places; instead, they are often located in countries with lower tax rates and record their revenues there. Amid the COVID-19 pandemic, millions of people started to work from home and thereby increased their use of digital products, resulting in governments losing their revenue from these foreign e-services. In such context, Indonesia, Vietnam and the Philippines have taken action to secure the public revenue from taxes by introducing the taxes on e-services provided by non-residents. The change is expected to create a fair business environment for the local e-service companies to compete with the foreign counterparts as well as to support the economy as it battles the pandemic’s impact.

              Indonesia, for example, applies the tax to foreign companies that have ‘significant economic presence’ in the country and in such sectors as big data, multimedia and software. Since June 2020, Netflix, Spotify, Google, and Amazon have been subject to 10% VAT, and later in August, Facebook, TikTok and Disney Plus – to name some – have been added to the list.

              In Vietnam, the National Assembly has approved a new law to collect 10% VAT from cross-border e-commerce traders and digital platform-based service providers. Non-residents are now required to register with the Vietnamese tax authority to enable tax declaration and payment. The implementation was scheduled to start in July 2020, but then delayed to 1st January 2021 in order for the government to establish a mechanism and to provide detailed guidance for implementation of the law, including setting up an online system for tax registration and declaration. The Philippines also plans the same timeline for implementing the tax setup.

              Despite being the later to join the taxation of foreign digital services, Thailand’s Cabinet also approved a draft bill in June to impose VAT of 7% on digital services of foreign providers, including streaming and downloading media and apps, as well as advertising on social media platforms. The measure is being accelerated to help ease the financial impact of the COVID-19 crisis. It is expected to contribute 3 billion Baht (about EUR 100 million) to the public revenue annually.

              Southeast Asia is a fast-growing digital market with about 400 million internet users as of today, and a total market value of more than 100 billion USD. The internet economies of Malaysia, the Philippines, Singapore, and Thailand are growing between 20% and 30% yearly, while the growth rate in Indonesia and Vietnam is above 40%. As the region’s attractiveness to digital businesses will remain vigorous in a near future, companies which have already operated or are planning to make a move into this market should stay updated to the changes. In the latest wave of VAT imposition in Southeast Asia, companies are motivated to collect more information on their users, in order to determine if they are able to raise the prices. Companies that are dominant in a market will have a higher possibility to pursue that director. In contrast, if a business is constrained by a fixed pricing with the customers, or it is in a highly competitive market with the local service providers, it may be forced to stay at the same pricing level towards their customers.

              Graph showing number of internet users in South East Asia

              In conclusion, countries in Southeast Asia are imposing a VAT on international providers of e-services, such as streaming platforms. The tax is supposed to help foster a sustainably business environment between domestic and international providers, while also increasing the tax revenue. Singapore, Malaysia and Indonesia have introduced it already, while Vietnam, Malaysia and The Philippines are planning to do it at the start of 2021.


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                by Asia Perspective Asia Perspective No Comments

                Opportunities in Indonesia’s Digital Landscape

                Indonesia is undergoing a rapid digitalization, with over 107 million internet users as of June 2019. The number is expected to exceed 150 million by 2023, making Indonesia the biggest online market in Southeast Asia. However, there are some challenges related to the logistic infrastructure and online payment methods that Indonesia needs to overcome in order to reach its full potential.

                 

                Indonesian women using a smartphone

                 

                The Indonesian digital economic landscape has seen a rapid growth during recent years, reaching a total value of 40 billion USD in 2019, an increase of 400% since 2015. The internet economy value is based on the five key sectors: online travel, online media, ride hailing, e-commerce and digital financial services, and is presented annually in Google’s report SEA e-Conomy.

                The massive growth of the online market in Indonesia has been due to a wide range of favorable factors. The biggest contributing factor for the growth has been the increasing Indonesian middle class, a highly tech-savvy population. In addition to the large number of internet users, Indonesia also has a great number of smartphone users, and a recent study from GlobalWebIndex showed that 79% of the population between the ages of 16 and 64 has made at least an online purchase via a mobile device.

                However, there have been some challenges in the logistics and infrastructure of the country to keep up with the growing demand of online purchases. The Indonesian government has made continuous efforts in improving the country’s logistics and infrastructure. Two of the most prominent projects that have been launched associated with these developments are the “Trans-Java Toll Road” and the “Palapa Ring” projects. The first aiming to cut logistics cost and encouraging economic activities on the island of Java, by facilitating transportation between key areas. The later project’s purpose is to deliver high-speed internet services to under-developed regions of Indonesia, and thereby help to accelerate the country’s internet penetration rate.

                Graph showing Aggregated Logistics Performance Index of South East Asia Countries in 2018

                Even though Indonesia increased its rank in logistical performance from 63rd to 51st between 2016 and 2018, according to the World Bank’s ranking, it is still lagging behind its middle-income neighbors Thailand, Vietnam and Malaysia. This is due to certain obstacles, such as the disordered address system, unstandardized shipment processes, and the country’s vast geography of more than 17,000 islands.

                The growing e-commerce also means that the number of orders will subsequently increase, both domestically and internationally. Therefore, there is intense pressure to improve the country’s logistics infrastructure in order to meet the market demands.

                Another big challenge that the online commerce of Indonesia has to face is the low level of cashless payments. Payment adoption and security are prerequisites for a growing online commerce market. However, only 49% of the Indonesia population have a bank account and access to financial services. The proportion of fully “banked” citizens with full access to financial services is even lower (only 23% of the population). These numbers are well below those of other SEA mid-income countries such as Malaysia and Thailand. The majority of transactions in Indonesia are still cash-based, which subsequently results in greater complexity and high costs for processing them.

                Graph showing Populations of three Southeast Asia leading countries in online commerce by financial service usage

                To secure and encourage the adoption of cashless payments, the Indonesian government launched the national payment gateway (Gerbang Pembayaran Nasional) in 2017, that enables an interconnected payment ecosystem. The initiative results in shorter transaction times, lower fees and safer transaction, and hence, is expected to increase the adoption of cashless instruments in Indonesia. Besides, the growth of online commerce in recent years has offered an opportunity for widespread adoption of cashless payments since people perceive it as more convenient when making purchases online. The convenience of online shopping will then attract more new shoppers and ultimately increase the value of the internet commerce market.

                Chart showing Indonesia online-commerce payment methods by value in 2019

                In 2019, DataReportal reported that the value of digital payment in Indonesia was 32.44 billion USD, and the annual growth rate was forecasted to be 21% in 2020. To handle the fast-growing demand of online payment and enhance the customer experience, more partnerships between fintech payment systems and banks needs to be established. This is an opportunity for enterprises and investors, but it also requires the government to come up with suitable policies to regulate and foster cybersecurity.

                In conclusion, the Indonesia’s internet economy is growing quickly with the outlook of becoming the largest online market in Southeast Asia. On the way to reach its full potential, there are two challenges that needs to be solved, improving the country’s logistics infrastructure and encouraging the use of online payment methods. The upgrade of logistics infrastructure will enable faster and more efficient shipments, which contributes to a better customer experience. Likewise, the adoption of cashless payment methods will also increase convenience and efficiency of transactions. The fulfilment of these two challenges will bring benefits to all parties involved in the online commerce market, and thus, make way for further growth. In order to achieve that vision, there is a rising need for close collaboration between the government and private sector in upcoming years.


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                  by Asia Perspective Asia Perspective No Comments

                  A positive outlook for Indonesia’s investment landscape

                  Despite global uncertainties, Indonesia has remained one of the best performing countries in Asia throughout 2019, in terms of maintaining an economic stability. The largest economy of Southeast Asia saw an economic growth rate of 5.02% during 2019, beating the 5% mark for the fourth consecutive year.

                   Jakarta

                   

                  One of the key drivers of strengthening the economic resilience in Indonesia has been an effective combination of fiscal and monetary policies. During 2019, Bank Indonesia (BI) lowered its reference interest rate four times, in total with 100 basis points, to help boost the domestic economical growth. As of February 2020, the reference rate currently stands at 5%. Furthermore, the central bank also launched several macroprudential policies to help boost the growth in prioritized sectors, such as loosening the loan-to-value (LTV) ratio for housing and vehicle loans by 5-10%.

                  Additionally, BI decided to invest and strengthen the country’s digital payment infrastructure by introducing a Quick Response (QR) code standard. The standard is called QR Indonesian Standard (QRIS) and can be used for digital payments through server-based e-money applications. QRIS aims to enhance the ease of transaction efficiency, accelerate financial inclusion and help small and medium sized enterprises advance, and therefore further stimulating the economic growth of the country. Initially, QRIS will be implemented where merchant will have the opportunity to display a QR code to be scanned by the customer, giving smaller and medium sized companies a cash-free transaction alternative.

                  Graph showing Indonesia's GDP growth

                  Graph showing Indonesian companies by volume

                  Despite the policy changes and investments, Indonesia has been struggling to attract foreign investors to the country. Today, Indonesia have a number of blacklisted sectors to which foreigners are not allowed to invest in. However, the government has eased these regulations and plans to change the negative list into a positive list, outlining attractive, available, sectors to invest in by foreign companies. Exactly which sectors the list will include is yet to be seen, but as of today, it is still being discussed. The preliminary plan is to release it in the form of a Presidential Regulation this month (February 2020), and if the time schedule holds up it will take effect in March 2020. The Indonesian government hopes the transformation from a negative to a positive list will contribute to creating a better image of Indonesia and build trust in foreign investors.

                  In summary, there is a positive outlook for economic growth in Indonesia due to BI’s effective policy mix and introduction of QRIS. Small and medium sized companies is given a great opportunity to introduce cash-free payments to their businesses, making transactions faster and more efficient. Lastly, the introduction of the foreign investment list is giving clear indications that the possibilities to invest in Indonesia is being welcomed by the government, and that the opportunities in the country are growing.


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                    by Asia Perspective Asia Perspective No Comments

                    The best market for FinTech right now is Southeast Asia

                    According to a study about FinTech companies, the ASEAN market is representing the greatest opportunities for FinTech development in the nearest future. The report made by Deloitte and Robocash, in which more than 60 private FinTech firms were surveyed, states that Fintech investments in Southeast Asia in 2018 have exceeded the US$5.7 billion investments in 2017 by up to 20-30%.

                     

                    Paying for goods with a mobile phone

                     

                    Looking at the Southeast Asian market we have been seeing some successful ride-hailing startups, digital payment startups and some money remittance startups over the last couple of years. Right now, you could say that all eyes are on Southeast Asia and all the FinTech developments going on over here.

                    The most promising areas in FinTech right now are the online lenders and FinTech firms that facilitate access to credit.

                    What contributed to this continued growth is the insufficient financial inclusion that has opened up these opportunities for the entire FinTech industry. And the robust growth in the ASEAN market is set to continue as the FinTech market is expected to grow at CAGR of 72.5% from 2015 to 2020, reaching US$72 billion by 2020, according to Frost & Sullivan’s annual Fintech Outlook.

                    The Southeast Asian region has around 266 million people living there, with limited access to basic financial services. There are also over 30 million small-to-medium sized enterprises underserved by the financial system in this region, together facing a collective credit shortfall of around US$175 billion.

                    We can safely say that the potential market for FinTech in the ASEAN region is significant.

                    Distribution of Fintech Companies in ASEAN

                    Looking at the Southeast Asian market we have been seeing some successful ride-hailing startups, digital payment startups and some money remittance startups over the last couple of years. Right now, you could say that all eyes are on Southeast Asia and all the FinTech developments going on over here.

                    Southeast Asia´s Internet Economy Market Size

                    Mobile Payment

                    What contributed to the success of Mobile Payment startups in this region is mainly due to two factors, huge population with no access to basic financial services and the rise of mobile payment usage. The region is home to over 350 million daily internet users, with 90% of them using their mobile phones. With this kind of gap to financial services, there has become a significant demand for mobile payment apps and mobile banking.

                    Money Remittance

                    Along with mobile payment, the people in Southeast Asia are also using services for money remittance in a quite wide extent. The market in Southeast Asia for money remittance services is booming right now.

                    According to a recent study, the remittance market in ASEAN region were valued at US$70 billion in 2017, and have since kept growing. Contributing to this growing market are a large group of migrant workers in countries like Indonesia, Vietnam and the Philippines, who are looking for an easy low-cost remittance service.

                    Ride Hailing

                    Looking at the ride hailing market it has become one of the most successful markets in Southeast Asia and has grown four-fold since 2015 and will be a US$20.1 billion market by 2025.

                    There are over 35 million Southeast Asians using ride hailing services every month and 9 million daily rides across 500 cities. The top players in these markets are GO-JEK, Uber and Grab, who are all contributing to the economies by creating full-time jobs within these markets. In 2017 these three players engaged more than 2.5 million SEA drivers.

                    As more and more sectors of Southeast Asia’s economy are transformed by the internet, the opportunities for tech startups to deliver the enabling digital financial services will multiply. We are now seeing a large number of firms investing in startups in the region or launching FinTech incentives to tap into this growing market.

                    Looking forward, we expect to see continued growth in the FinTech funding, both in terms of size and deal numbers in the ASEAN region.


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                      Marcus Sohlberg, Business Development Director

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                      During the consultation we will discuss your needs and how Asia Perspective can help. Please fill out the form and you will be contacted within 24 hours.

                      Marcus Sohlberg, Business Development Director


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