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What Foreign Investors Are Missing About Indonesia

Foreign investment in Indonesia is not new; the country was a popular investment destination in the 1990s, perhaps even the China or India of the time. Indonesia emerged from the ashes of the 1997 Asian financial crisis and what some investors fail to appreciate is how much things have changed since then.

Heavy morning traffic, Thamrin Street, Jakarta, Indonesia
AP
Heavy morning traffic, Thamrin Street, Jakarta, Indonesia

My overriding impression – after about ten years of living and working there – is that people don't always fully understand the risks involved in investing in Indonesia and, crucially, how these risks can be managed.

The areas of concern at the forefront of people’s minds tend to be corruption, the question of political stability, poor infrastructure (and the issue of land acquisition) and the problems inherent in the legal system.

Politically, Indonesia is now stable - especially when compared to some other countries in the region.

More relevant is the political will required to identify, commit to and push through the infrastructure projects that Indonesia needs in order to continue to thrive and grow. The capacity of the current infrastructure system is one of the most significant barriers Indonesia faces. The development of roads, airports and ports is crucial in supporting the expansion of all the sectors currently under the spotlight.

The government is now showing a more active commitment to the development of infrastructure. Several infrastructure projects have recently been announced and the government’s infrastructure guarantee programmes are progressing.

Conceptually these guarantee programmes are on the right track; while they are yet to be fully proven, they demonstrate a commitment to foreign investment. Support from the multilaterals and export credit agencies (ECAs) is increasingly forthcoming, and crucially gives comfort to the lending banks.

Another area of concern for potential investors is the judicial and regulatory system. However, the people who invest successfully in Indonesia are those who understand this particular risk and accept it for what it is (or is not). They concentrate instead on mechanisms for managing risk and accept that the courts are not always, at present, a backstop when things go wrong.

Interestingly, and contrary to perception, the courts have been seen to take an even-handed approach to litigation involving foreign companies.

Looking forward, the sectors to watch are energy (particularly power, as domestic demand outstrips supply), natural resources (still with great untapped potential), infrastructure (roads, airports and ports) and agricultural commodities (particularly palm oil). There is strong momentum in all these sectors, particularly if infrastructure development is sufficient to support this growth.

The push to “commercialize” the state-owned enterprises (SOEs) has been promising, particularly through the installation of stronger management from the private sector.

The appetite for private equity investment is improving with local companies becoming more receptive and both international and local private equity houses looking at more deals – the recent CVC/Matahari deal may well signpost the beginning of a trend.

Indonesia essentially suffers from bad PR and a great many misperceptions about the market and the political and legal environment. With some clear political direction from the government, a great deal could be achieved to overcome these perceived barriers to inward investment. As it is, Indonesia is certainly one of the most attractive investment opportunities in the region.