Indonesia: Market Overview

Despite being the world’s largest archipelagic state and fourth most populous country – it is estimated to be home to over 255 million people – Indonesia is not yet a major player on the world stage. Indonesia presents huge opportunities and challenges to businesses, international investors and its government alike and the country has seen a considerable shake-up in the past 12 months with President Joko Widodo enacting substantial changes since entering office in October 2014. Earlier in 2015 Who’s Who Legal travelled to Jakarta to meet some of the country’s leading lawyers and to find out more about this future superpower.

With the election of Joko Widodo, the country (for the first time) has a president who does not have links to former leader Suharto and has not come from a military background. Widodo’s strong nationalist views and commitment to “clean politics” that made him so popular with the masses have now begun to transfer into his policymaking. In a bid to strengthen the country’s economy he has pledged close to US$500 billion to spend on developing infrastructure over the next five years. It is hoped that this huge investment will help to revitalise the nation’s lagging growth and make it a top investment destination for international businesses.

Economic growth has been lower than expected in the past year, hitting its lowest level since the global financial crisis in the second quarter of 2015 at only 4.67 per cent. This has prompted concern that the country’s economy is not as stable as previously believed. Should the levels of growth continue at these depressed levels the country could begin to face new issues in the coming years. Lawyers we spoke to suggested that the disappointing growth and falling rupiah spell a time of uncertainty for Indonesian business with international investors, which the government is keen to attract, remaining cautious.

Despite these current troubles, Indonesia notably did not succumb to the global financial crisis, when other Asian countries’ economies faltered. This has largely been attributed to the populous country’s ability to simply “spend its way out” of a recession. This largely capitalist nation is seen by some to be at odds with the traditional views of a Muslim state, with Islamic finance only a very small part of the work the capital markets lawyers we spoke to covered. As one lawyer put it, “Islam is an important aspect of the country, but not part of its economy.”

Policy changes

The continuing slump in the rupiah, currently at its lowest rate since the 1998 Asian financial crisis, has led the government to implement new rules in the hope of curbing the downturn. One of the new laws involves the mandatory use of the rupiah in domestic transactions, meaning that deals that would previously have been carried out in US dollars must now use the local currency. Crucially these new rules do not apply to international transactions. Practitioners noted that charging local clients in rupiah, especially as the strength of the currency continues to diminish, means that it is much harder to predict how much money will be made over long-term contracts.

Infrastructure projects are being heavily pushed by Widodo’s government, although practitioners note that while many are in the pipeline, few have yet to make it to fruition. Shipping is one of the biggest areas which needs addressing as despite being the largest island-based nation in the world Indonesia has long been criticised for its outdated and inefficient ports and shipping systems. Indeed, as one lawyer noted, “it is cheaper to ship oranges from China than it is from Borneo” in the east of the country, despite it being only a quarter of the distance. It is hoped that following the US$6 billion that has been promised for building and improving ports, the nation will finally have the port infrastructure worthy of a country made up of over 17,000 islands.

Another of Widodo’s new initiatives is the streamlining of government processes, in the hope of moving towards an “e-government”, where many procedures are moved online in a bid to cut time frames. The country is notorious for its slow bureaucratic turnaround, with matters that could take hours or days in other countries regularly taking weeks or even months. It is hoped that this move towards much faster timelines will help to attract foreign investors, who have previously been deterred by the long bureaucratic delays. However, several lawyers we interviewed noted that “not everyone seems to have got the memo about the changes” and clients are still regularly hitting roadblocks in their endeavours.

Many of Widodo’s major policy changes have had a nationalist stance, in a bid to both strengthen the country’s economy as well as develop its infrastructure. One area which the government is hoping to bolster is its telecoms market. Indonesia is predicted to be the world’s fourth largest smartphone user by 2018, with Jakarta already sending more tweets than any other city in the world, and more Indonesians using Facebook than the entire population of the UK. New legislation due to come into effect in 2017 will see the government taking advantage of this booming sector. All 4G smartphones will have to be at least 40 per cent produced in Indonesia, which has seen both Samsung and Apple announcing they will be moving some operations to the country in a bid to accommodate these new demands, ensuring they do not miss out on a lucrative slice of this technology hungry market.

Despite this apparent success, other nationalist laws have been seen to deter the investment of foreign companies in the country, and cause problems for those already in the market. Indonesia boasts some of the richest and most diverse natural resources in the world, but a controversial law introduced in early 2014 has meant that metal and mineral ores cannot be exported in their raw, unprocessed forms. Requiring producers to smelt all ores before exporting them is hoped to both add value to resources and create jobs but has received widespread criticism in the market. The cost of building smelters has been a major concern for many mining companies, with the downturn in commodity prices making further investment more difficult. Practitioners we spoke to noted that this was the major issue facing clients at the moment, with one stating that “only a handful of mining companies are in a position to fund them”.

Corruption

Indonesian business and bureaucracy has traditionally been riddled with corruption, with paying bribes to hurry work along and receive judgments sooner seen by many as the norm. Since reaching power, Widodo has taken heavy measures to help quell this ingrained backhanded way of doing business, both in an effort to make the Indonesian market fairer and to attract more foreign investment. The Corruption Eradiation Commission (KPK), established in 2002 aims to investigate claims of corruption and bribery across Indonesia. However, there have been several clashes between the KPK and the police, and more recently with those in Widodo’s own party, and the road to more transparent government has so far been slow. Practitioners we met suggested that there was still a lot to be done before the “seemingly ingrained” culture of bribery is stemmed, but that it is hoped that Widodo’s hard stance on the matter will help to boost changes within government agencies.

Legal marketplace

Foreign firms are currently prevented from setting up shop in the country in their own right, but alliances between international and local firms have been allowed for some time. Although local firms are able to forge links with foreign entities, the legislature is unclear as to what this actually means. The lack of clarity regarding the matter has led to a market with very varied levels of involvement from “associated” firms, ranging from the referral of clients and work to those that essentially have merged with their international partner. The sizes of these associated firms varies wildly too, from sole practitioners linking with a foreign firm that wants to be able to offer specialist advice to clients in a particular field, to full-service local firms looking to broaden their international clientele and expertise with an association with an international entity. The rules regarding foreign practitioners in the market are somewhat clearer: foreign lawyers are now required to complete a legal course and exam on a code of ethics before they are allowed to advise clients on foreign law aspects, but are not allowed to appear in court and can only be employed by an Indonesian law firm.

During our research we encountered a fairly broad range of opinions regarding the role and benefits of foreign firms in the market. Many believe that they add competition and allow clients to shop around more, while also forcing firms to continue to improve services. However, some believe that larger firms are not able to offer clients the close attention and relationship that smaller independent firms are able to, and that the lower overheads of these firms also allows them to offer better value for money. Many did note that international clients often felt more comfortable dealing with “a name they recognise”, but those from independent firms felt their ability to attract and retain foreign clients spoke to the quality of their work and reputation.

The country’s legal market is almost exclusively focused on Jakarta, although some firms do have offices in other locations already, notably real estate firms in Bali. Other firms we spoke to were considering opening other offices in the country to broaden their reach, with most looking to the country’s second city of Surabaya as a potential location. 

It is clear that despite the changes Widodo has ushered into the country since his election in 2014, Indonesia still has some way to go before it is the modern investment destination many hope for. The struggling currency and stalling growth both indicate more trying times to come. Despite this, there is widespread hope and belief that the emerging nation will soon reach its potential and become the player on the world stage that it has hoped to be for so long.

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