Country Risk Check: Indonesia
With GPs and LPs gung-ho for Indonesia while memories of post-1997 chaos there still linger, the market needs a risk check to assess the actual degrees of uncertainty in the country: whether dangers of another Asian financial crisis-style national collapse, or from Islamic terrorism, or other sources.
“Indonesia is still one of the more difficult countries in the region in terms of doing business,” remarks Jacob Ramsay, Senior Analyst for Southeast Asia/Indonesia at Control Risks. “Having said that, Indonesia is still very much a good news story.” The question is whether outside investors above all are reading the right headlines, and reaching the right conclusions.
Corruption is one of the clichés that resurfaces perennially about. Indonesia was the equal seventh most corrupt of 69 countries surveyed by Transparency International for its 2009 Global Corruption Barometer. But while Ramsay feels that, “foreign investors do tend to fall back on the clichés to explain why they won’t do certain things,” he also admits that even Indonesia’s “top-tier” anti-corruption infrastructure “doesn’t have the strength required to overpower the vast vested interests that still link business to politics at the national level and regionally.”
While most Indonesian market players agree that the government is making progress in its anti-corruption drive, they also feel, as Dennis Wuisan, Partner at Kendall Court Capital Partners in Jakarta, puts it, that “in bureaucratic reform, the toughest part is the corruption part, because that’s still endemic in the way [Indonesians] do things.” However, Ramsay adds, Indonesia is broadly similar in this respect to many other Southeast Asian countries, or China – only different in degree.
As for political risk, “the most compelling example of the actual level of instability is the conduct of the 2009 elections, which was smooth,” according to Ramsay. Here, contested results in the legislative election went to the Constitutional Court, and the results were respected, unlike, for instance, Thailand. “There was plenty of margin for some of the aggrieved parties to agitate: they didn’t,” Ramsay notes. And Islamic parties lost out in the voting in favor of secular groupings.
The government’s continuing pressure on the Islamic fringe is shown by the level of security in Jakarta, where most major buildings have a metal detector and other screenings at all entrances, which seems well out of proportion to actual incidents. The current government’s simple ability to do the legal and other reforms needed to foster development may be more of a real concern for investors. Here, CLSA’s Nick Cashmore cautions, “there is probably always going to be a disappointment to the government’s ability to execute on infrastructure and investment plans.”
Further reading
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