Indonesia Country Report

Infortal Worldwide Geopolitical Risk Summary  

Indonesia is the world's fourth most populous country and the third largest democracy. 

The country is a vast archipelago of over 17,000 islands along some of the world’s most important trade routes. In 1998 the decades-old brutal dictatorship that dominated most of the post-independence era fell and a democratic government was installed. Since then, they have made significant democratic reforms. 

Indonesia has sought to harness its economic potential through ambitious infrastructure projects and reforms intended to attract foreign investment. As a result, Indonesia poses numerous business and investment opportunities. Still, it has a complex and diverse risk landscape, necessitating dynamic due diligence and planning to navigate these challenges safely and successfully. 

Political Update 

In March 2024, former Defense Minister and Special Forces general Prabowo Subianto was confirmed as the new president of Indonesia and will come into office in October 2024. 

Much of Subianto’s campaign focused on continuing the work of former President Joko Widodo (often referred to as Jokowi), whose administration centered on the country's social and economic development. Subianto’s inclusion of Jokowi’s son as his vice-presidential running mate capitalized on the widespread popularity of the Jokowi administration for his election. 

While many of Subianto’s goals align with those of the previous administration, doubts about his sincerity and character have concerned some analysts. For example, Subianto has a troubled record with human rights abuses dating back to his time as commander of the special forces. He has also shown to be variable in his character and rhetoric, particularly regarding upholding democratic institutions. 

With security concerns in some Indonesian provinces (such as Papua), some worry that Subianto’s history and nationalistic rhetoric will stoke further conflict and stifle democratic gains. While this brings up valid concerns for many within Indonesia and the international community, Subianto has often denied allegations about his past. 

Economic Update 

In 2019, President Jokowi announced several massive infrastructure development plans amounting to more than $400 billion. This is in line with the push to further development outside of the island of Java, which hosts the current capital, Jakarta, and over 50% of the country’s population. 

Bolstering development elsewhere will improve connectivity between major population centers and outlying islands and facilitate migration from densely populated areas to less-populated areas. 

Central to this development agenda is relocating the political capital from Jakarta to Nusantara in Borneo. The government has pledged over $30 billion to the project but has also called on the need for foreign investment. 

Nusantara is set to become the new capital by 2045 and will attract civil servants and supporting industries, as well as the government’s aim of 1.9 million people relocating there. 

To facilitate funding for these projects, the company has instituted reforms to decrease barriers for international investors and further develop financial infrastructure. These reforms have made foreign investment more accessible, though protectionist policies hinder some sectors. 

In addition to the recent push for infrastructure development, Indonesia’s vast and growing population of over 280 million people provides a strong demand for goods and services and diverse human capital to employ in various industries. 

Indonesia’s geographic position along the Strait of Malacca makes it an ideal location for exporting goods and raw materials. It is at the center of trade between East Asia, South Asia, Europe, and Africa. 

Key Investment Sectors 

Indonesia offers diverse investment opportunities across multiple industries. Its network of special economic zones helps lower barriers for foreign businesses and investors by streamlining regulatory processes and catering to the needs of specific industries. 

Major areas to invest in include: 

Nusantara: Indonesia is in the process of moving its political capital from Jakarta to Nusantara. Major infrastructure development projects, including port and airport upgrades and improved healthcare, accompany this move. The government has issued several incentives for foreign investors, including tax breaks and exemptions.

Tourism: The government considers tourism a priority industry for foreign investment. To facilitate investment, 13 special economic zones, 15 industrial parks, and ten strategic Tourism Areas have been created. 

Export-oriented Industries: Export industries include electronics, machinery, automotive, and wood products. Major industrial centers offer logistical and human capital advantages to these industries. 

Maritime: Maritime industries, such as shipbuilding, fishing, and seafood processing, are major and offer opportunities for investors. 

Agriculture: Although agricultural products have shrunk in their proportion of GDP in recent years, agriculture remains a leading industry, accounting for over 12% of GDP. Mining and Natural Resources: Indonesia is endowed with an abundance of natural resources and has a robust mining industry. Major mining products include copper, nickel, gold, and coal.

Recommendations for Companies and Investors  

Some significant concerns for foreign businesses and investors in Indonesia include economic nationalism and protectionism, a complex and frequently shifting regulatory environment, corruption, underdeveloped infrastructure, and inconsistent and slow bureaucratic processes. 

Cultural nuances, security challenges, and climate-related events are also notable. 

Protectionist policies and economic nationalism can make it difficult for foreign firms to compete in the domestic market. It can also make land acquisition and licensing agreements difficult. 

Firms may be expected to partner with local businesses. Some industries may face more significant barriers than others. For example, the government has pushed to nationalize or become the majority stakeholder in considerable mining and energy production operations. 

Recent regulatory advancements have eased the burden of navigating the legal system; however, issues such as the uneven application of regulations exist. To avoid legal risks, gaining a local understanding of the regulatory requirements is important. 

Corruption continues to be a concern. Proper due diligence and vetting supply chains and executives are paramount to mitigating corruption risks. Companies should take special care in public procurement as it is often susceptible to corruption risks. 

Indonesia is an extremely diverse country with hundreds of languages, religious groups, and ethnic groups. Understanding that cultures and languages differ throughout the archipelago is important for companies doing business in various locations. The local context matters in how you communicate with local officials, employees, and clientele. 

Deep due diligence is essential to ensure compliance with US laws and regulations regarding doing business in and around Indonesia. If your firm operates in the region, avoiding heightened Foreign Corrupt Practices Act risks is critical.

If you are entering the region for the first time, you should also conduct a geopolitical risk assessment to ensure that there are no emerging political risk considerations that could impact your firm’s operations.

Want To Know More?

For a deeper review of political, economic, due diligence and security risks for Indonesia, please contact us.