The year 2017 was a good one for Indonesia: A ratings upgrade to BBB- from S&P gave it investment grade status from all global rating agencies, the country climbed 19 spots on the World Bank’s Ease of Doing Business rankings, and the stock market repeatedly hit new highs. On the back of estimated FDI growth of 11 percent last year, Indonesia is targeting for direct investment to grow by up to 14 percent in 2018, but lawyers say a number of uncertainties remain for companies looking to enter the country.


The first piece of good news for Indonesia in 2018 came pretty early – in fact, even before the year had started. In November last year, the World Bank announced its Ease of Doing Business (EODB) index for 2018, in which Indonesia climbed 19 places to 72 from its previous rank of 91. It was not exactly a huge surprise, given that the country had been steadily climbing in the rankings since 2014 – when Joko “Jokowi” Widodo, the current president, took office and Indonesia was in the 140th spot. 

Much of this success has been attributed to Indonesia’s deregulation of its economy. According to the World Bank’s report, the Southeast Asian nation scored 83.87 percent in “distance to frontier” metric, which helps assess the absolute level of regulatory performance over time. Indonesia’s score represented the best performance observed since 2005 on each of the indicators across all economies in the EODB sample. 

But that’s not the only reason 2017 has been a good year for Indonesia. The Jakarta Composite Index (JCI) repeatedly broke its own record last year, increasing by 19.99 percent to 6,355.66. And in May, rating agency Standard & Poor’s (S&P) upgraded Indonesia’s sovereign ratings to investment grade. Fund managers told Reuters that the investment grade from S&P, which matches the ratings awarded by Fitch and Moody’s years ago, will give Indonesia access to a wider pool of investors. 

All this has raised hopes of a massive wave of investment into Southeast Asia’s biggest economy. In early January, Thomas Lembong, chief of Indonesia Investment Coordinating Board (BKPM), says that 2018 direct investment growth is targeted to grow at around 10-14 percent. The e-commerce and services sectors are set to be two of the biggest drivers, expanding by up to 80 percent and 40 percent per year, respectively. For 2017, Indonesia had set a target of about 11 percent expansion. 

The mood among foreign investors is definitely improving, lawyers say. “Foreign investors see that Indonesia has been moving in the right direction in terms of economic and legal reforms,” notes Genio Atyanto, managing partner of Indonesian law firm Nasoetion & Atyanto (N&A). “They see that in the last two years, the country has been showing lower credit and currency volatility risks. Such lowered risks, combined with positive regulatory changes, have been attracting foreign investment.” 

Ayik Candrawulan Gunadi, a partner at Ali Budiardjo, Nugroho, Reksodiputro (ABNR), says that there has been a meeting of minds among the government and its various stakeholders in terms of a setting a common objective. “They have realised that in order to survive and thrive in the era of global competition, all parties must work together toward a shared goal: Create a conducive and more attractive investment climate in Indonesia,” he notes. “This state of affairs has pushed everyone to move in the same direction, and that has led to investors feeling more comfortable by providing them simpler and cheaper investment procedures, as well as protecting them by providing clearer legal certainty.”

According to Ivan Baely, the managing partner of Jakarta-based Ivan Almaida Baely & Firmansyah Law Firm (IAB&F), the fundamental changes from a foreign investor’s perspective have been in the licensing procedures, which are regulated by BKPM. “BKPM has kept on improving its online application system, through which the investment licenses for foreign investors can be processed and issued faster,” he says. “Currently, the investment registration – previously known as the “investment principle license” – can be issued online by way of an electronic signature, and the authenticity of the license can be verified online.” 

He adds that previously, foreign investors in all business fields needed to obtain an investment registration and follow that with a business license in order to start operating their business. “However, currently pursuant to Article 11 (2) of the Head of BKPM Regulation No. 13 of 2017 regarding Guidelines and Procedures of Investment Licensing and Facilities, investors in certain business fields can be directly given a business license.” This is subject to the following conditions – that the applicant has registered as an Indonesian legal entity with the shareholding limitation pursuant to the provisions in the laws and regulations; that it has obtained a taxpayer registration number; and that it has secured an office or a business space. 

And all this has translated to increasing work for law firms, particularly when it comes to setting up of foreign companies in Indonesia. “These fundamental changes have certainly positively impacted our work as a law firm,” says Baely. “We are able to increase the confidence of our clients, especially foreign investors when it comes to the establishment of a foreign limited liability company in Indonesia in a timely manner.” Agrees Gunadi: “There has been a positive trend in the establishment of foreign-owned companies and more active M&A transactions in various sectors.” As for Atyanto, his firm is seeing a “notable increase” in FDI, financing and restructuring work.


A number of factors are working together to improve the business climate in Indonesia. Atyanto says that according to the article published by the Secretariat of the Cabinet of the Republic of Indonesia, the main drivers of the general EODB ranking improvements are three factors: resolving insolvency, enforcing contracts and getting electricity. “According to the World Bank’s press release on the increase of Indonesia’s EODB ranking, for the past year, Indonesia has also improved in, among others – lower business set-up costs, more access to credit, application of the electronic billing system for tax, customs and excise as well as non-tax revenue, and a lower property transfer tax,” he adds.

Much of the credit for this transformation should go to Jokowi, says Gunadi. “The leadership of our President Jokowi has been a significant driver for the improvement of the investment climate in the past few years,” says Gunadi. “Jokowi will not settle for 72nd position, and instead has targeted for Indonesia to climb even further up the EODB ranking – to 50th position by 2019 and 40th position by 2020. This initiative is translating into more investor-friendly regulations, which streamline the investment procedures and make it easier for investors to obtain their general licenses and specific business licenses. These amendments to the regulations, particularly those related to simplification, have been pivotal to Indonesia’s improvement in its EODB ranking.”

He adds that Indonesian startup companies are also attracting tremendous interest from foreign investors due to Indonesia’s fast-growing population as well as its rapid advances in the technology sector. “This includes startups using digital platforms to providing services to the public within the finance, travel and leisure, transportation, e-commerce and many other sectors,” Gunadi says. “The growth of Indonesian startups is also supported by the Ministry of Communications & Informatics through its Next Indonesian Unicorn programme that focuses on producing another Indonesian unicorn company (i.e. companies having more than $1 billion in valuation) after Traveloka, Go-Jek, Tokopedia and Bukalapak. Other than regulatory efforts, these types of programmes are expected to increase the competitiveness of Indonesian startups and ultimately attract more foreign investors.” He adds that other notable businesses within the financial technology (fintech) space that are seeing a lot of investor interest are peer-to-peer lending, electronic money and electronic wallets in the finance space. 

According to Baely, IAB&F is assisting clients in areas such as trading matters such as distribution, import and export, along with fintech. “We have seen increasing foreign investor interest in the field of fintech,” he says. “This business field is being regulated under Head of Financial Service Authority (OJK) Regulation No. 77/POJK.01/2016 regarding Lending and Borrowing Money Services Based on Information Technology.”

Fintech is also a key area for Atyanto, who lists it alongside infrastructure, energy and e-commerce among sectors attracting investor interest. “Fintech is becoming increasingly important as these businesses need capital to grow increase market share, and such capital may not be available sufficiently from domestic investors,” he says.


Despite the improving investment climate, Indonesia still remains a challenging place to do business, and this is where lawyers play a critical role in guiding investors. Common complaints from companies have included instances where regulations were changed after investors obtained the principle license; the lengthy and costly process to obtain all required licenses; the high costs of logistics due to poor infrastructure or energy supply; the difficulties in buying land; and high-interest rates at local banks, among others. 

Additionally, there is the issue of conflicting regulations governing the same issue at the local and the central level. There are times as well when the lack of coordination between the central and regional governments can cause confusion for investors. “Many regulations and policies are still conflicting at the regional and national levels,” Atyanto says. “However, if the government decides to take action by issuing, amending or revoking the regulation for the sake of synchronization, it may affect the perception of investors about legal certainty in Indonesia.”

He adds that Indonesian laws and regulations tend to focus on safeguarding the country’s national interest. “There are certain sectors which are attractive for investors but the allowed foreign ownership in those sectors is limited,” he says. “In capital-intensive business sectors, foreign investors experience difficulties in finding a local partner who is interested in the business but at the same time also has the capital to meet the capital requirements.”

As a law firm, N&A always strives to bridge the gap between the investors’ plan and expectation and the Indonesia regulatory regime, Atyanto says. “Ensuring we have a good relationship with regulators, financial and tax advisors, as well as businesses, and knowing who the right contacts are when it comes to seeking guidance on vague or conflicting regulations is a crucial aspect that we cannot neglect as a law firm.”

It is a similar experience for Baely, the main challenge for certain foreign investors is complying with the Presidential Regulation Number 44 of 2016 regarding List of Business Fields that are Closed and Business Fields that are Open with Conditions in the Investment Field, known commonly as the Negative List. “The Negative List determines whether a particular business activity in a certain KBLI code is open, open with conditions or closed for foreign investment,” he says. “Foreign investors often face difficulties in finding a local investor in order to comply with the foreign shareholding limitation pursuant to the provisions in the Negative List. In this case, as a law firm, we assist our foreign investor clients to comply with the prevailing laws and regulations in Indonesia and in certain cases to assist in drafting the shareholder agreement or joint venture agreement with the local investor.”

Gunadi says that while the investment climate continues to improve, certain Indonesian regions may not be progressing at the same pace, compared to larger cities. “This challenge is more apparent in businesses that are involved in natural resources, due to, among others limited infrastructure facilities and more complex investment procedures which are subject to regional regulations or customary laws applicable in those certain areas. “It is common practice for ABNR lawyers to support clients in their dealings with local authorities in order to identify and overcome investment barriers and legal risks by providing hands-on services to clients on site.”


Lawyers, in general, feel upbeat about the next few years, particularly as the effects of the new regulations kick in. “The government and stakeholders are working hand-in-hand to create a better investment climate, and hence it is expected that business in Indonesia will thrive in the coming years,” says Gunadi of ABNR. “This will positively impact Indonesia’s economy in general, and M&A transactions in particular. Within the framework of creating better investment climate, it has been widely discussed that the current Indonesian Negative List governing restrictions to foreign shareholding in certain business sectors will be amended. Although there is no definite timeline for this amendment, however, the new Negative List is expected to take effect in near future.” Baely at IAB&F says he believes that the Indonesian government, and in particular the BKPM and OJK will continue to work on improving the ease of doing business in Indonesia, both for foreign and local investors. 

Atyanto at N&A says that while investments will continue to increase, some investors may be in a “wait-and-see” mode because Indonesia is entering what he calls its “political years.” “In 2018-2019, there will be regional elections and general elections across Indonesia,” he says. “But it seems that the government is still optimistic about the increasing growth of Indonesia [SEE BOX] and that the targeted development of infrastructure will still be achievable despite those elections.”

“We expect to see that the government will put in its utmost effort to simplify and shorten the procedure of getting business permits, as well as eliminating the contradicting regulations. On the other hand, the government may also issue regulations related to fintech and other areas of technology in order to avoid significant disruptions to existing conventional businesses. This may also affect investment if not carefully addressed and regulated.”

Indonesia's regional elections ‘will not derail economic reforms’

By Tabita Diela of Reuters

Indonesia’s finance minister, pledging steady support for investment and exports, said in early January the government won’t be distracted from its economic reform program by provincial elections.

In 2018, Indonesia is due to hold scores of provincial elections, ahead of a presidential vote in 2019. The local elections have caused some concern that a heated political environment could hamper efforts by President Joko Widodo’s administration to push through reforms.

In a note on the 2018 outlook for Asia-Pacific sovereign credits, Moody’s Investors Service says that in India and Indonesia, regional elections are “likely to slow down any reform momentum”.

However, Finance Minister Sri Mulyani Indrawati expressed disagreement with that view.

“I want to point out that any reasoning that says the government will be distracted and not push through its reform programs, that is wrong,” she told reporters.

In 2017, a bruising election for governor of the capital Jakarta saw political and religious tensions in the world’s biggest Muslim-majority country hit the highest in decades.

Indrawati says the government “is now sitting together, coordinating (and) collaborating to make concrete improvements in investment and to support exports”.

She says there was a change of “mindset” to resolve problems facing investors and noted that authorities were also addressing issues faced by small and medium enterprises in paying taxes.

“Procedures will be easier, the terms will be simpler and everything can be done digitally,” she says.

The government has also rolled out a series of regulatory changes intended to encourage foreign investment and reduce the dependence on private consumption. Among them are steps to ease working with Indonesia’s notorious bureaucracy.

However, cutting red tape has proved difficult. In 2017, Widodo told off cabinet ministers for issuing regulations that will “add to bureaucracy and increase complications” for businesses wanting to expand or invest.

Foreign direct investment (FDI) rose 12 percent in the third quarter of 2017 from a year earlier in rupiah terms, compared with a 10.6 percent annual increase in April-June.

The government has made progress in building infrastructure, although sluggish growth in consumption and bank lending has meant policymakers have struggled to push economic growth significantly above 5 percent in recent years.

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