Indonesia has tremendous potential, but has
traditionally been held back by poor infrastructure and graft,
as Wayne Palmer of CLSA Capital Partners
Indonesia is already the fifth largest economy is Asia and the
largest in Southeast Asia. It managed to sustain growth
throughout the global recession and its potential as a place to
do business is underscored by favourable trends reported by the
World Bank, as well as the advantages conferred by its
demographics and natural resources.
The country's new president, Joko Widodo, popularly referred
to as Jokowi, swept to power in last year's elections promising
widespread economic reform. Jokowi is the first businessman to
lead the country and his presidency looks to be a friendly one
for investors coming to Indonesia's shores.
The president is aiming to see growth hit 5.7% this year,
with a target by the end of his five-year term of seven
percent. Since taking office on October 20 2014, Jokowi has cut
fuel subsidies and introduced a state budget focussed on a
much-needed increase in infrastructure spending.
"The shift away
from fuel subsidies to infrastructure is widely
regarded as being a positive driver of growth"
Indonesia had been subsidising fuel since the 1970s and it
kept prices at less than $0.20 per litre until 2005. Fuel
subsidy cuts have traditionally led to widespread protests in
the past, including riots over the cost of living that helped
to bring down the regime of General Suharto. However with the
impact cushioned by falling oil prices, the response this time
has been relatively muted, allowing Jokowi some leeway to
pursue his economic reform programme. And with around $18
billion in savings from the fuel subsidy cut, the new
government will be able to double spending on transport,
agriculture and public works such as housing.
However the country has traditionally faced a number of
challenges, not least graft. Meanwhile, improving Indonesia's
creaking infrastructure will not be a quick or easy task.
Jakarta sees constant traffic jams and roads outside the
capital are even worse. Manufacturers complain of difficulties
getting their products from factories to sea ports and
Wayne Palmer, chief operating officer and head of legal
& execution, SE Asia, at CLSA Capital Partners, the
alternative asset management arm of CSLA – explains
that responding to these challenges successfully, as well as
enacting judicial reform, will be key to unlocking Indonesia's
The World Bank's latest Doing Business report sees
Indonesia up three places from last year. What do you think
makes Indonesia an increasingly attractive place to do
Where Indonesia is concerned, it has huge potential as a
consequence of its favourable demographics and natural
resources. Widodo's government has come to power with promises
to tackle some of the graft issues that have held Indonesia
back in the past and also with promises to accelerate spending
on infrastructure. These are two good indicators of the reasons
for increased optimism going forward.
Nevertheless, navigating the business environment in
Indonesia remains challenging for overseas investors and change
is unlikely to be straightforward or fast.
A long-term, broad ranging and coherent infrastructure
spending programme is critical. Improvements in many government
agencies are required and, crucially, there would need to be
serious improvement to the judicial system for the ambitious
economic growth plans that Widodo has to bear long-term fruit
in taking Indonesia's economy to the next level.
How has graft held Indonesia back in the past?
Graft is not an Indonesia-only issue, but the array of
cross-border anti-bribery legislation to which offshore
investors are subject – be they financial investors or
strategic – can make the process of investing in or
doing business in jurisdictions with acknowledged issues with
graft more challenging and must have been a contributory factor
which has led to investment that may otherwise have come into
the country being held back entirely or at least scaled
How is the judicial system currently letting down offshore
The judicial system is inefficient and outcomes very
unpredictable. This is exacerbated given the ambiguous nature
of many of the laws themselves which make it a difficult
environment to operate with at least some confidence of how
commercial disputes that may arise may be decided and, once
decided, judgments enforced.
Are Bank Indonesia's 2014 rules requiring corporates to
hedge their external commercial borrowings too
I would not categorise them as heavy-handed. On the
contrary, I am of the view that the measures have the potential
to be sensible ones to enhance prudence in foreign exchange
business environment in Indonesia remains challenging
for overseas investors"
However, like all such measures, there is a period of
adjustment and reaction required from the market. Primarily,
the extent and scope of application needs to be ascertained and
then the mode of enforcement and extent of sanctions for
non-compliance will take some time to crystallise.
In addition, the possibly unintended consequences of the
range of the measures may need to be ironed out. For example,
in the initially published regulations there was a view that
companies with their revenues denominated in US dollars may be
disproportionately caught by the hedging ratio rules because of
the way 'Foreign Currency Liabilities' and 'Foreign Currency
Receivables' were defined. This has now been rectified by a
revision to the rules that was issued very quickly but is
perhaps an indication of the impact of the regulations not
having been comprehensively thought through.
What reforms would you like to see to enhance Indonesia's
investment climate over the coming years?
There are a number of issues that have and will continue to
hinder Indonesia's growth and investment climate. One of these
is poor execution of the infrastructure expansion plans as this
will ensure that Indonesia's weak infrastructure will continue
to be a drag on the productivity and investment climate.
However, for the infrastructure programme to be most
effective, other, more structural issues need to be addressed.
For example, the process by which the infrastructure projects
are awarded needs to be robust and transparent and the court
system needs to be improved in order to give, particularly
offshore investors, the confidence that proper, efficient and
impartial legal redress is available in the event of commercial
disputes. This will not be easy to achieve on the timescale
within which the infrastructure programme needs to be rolled
out and so it remains an obstacle.
Finally, there needs to be a continued investment in
education to deepen the talent pool available. Whilst Indonesia
has favourable demographics, it needs to combine this with
increasing the education and skills levels of those people to
compliment the ambitious economic growth plans.
Where do you see opportunities in Indonesia over the next
Infrastructure, being a focus of the Widodo government,
presents many opportunities in the near-term. The shift away
from fuel subsidies to infrastructure spending is widely
regarded as being a positive driver of growth and the ambitious
plans the Widodo government has for a large scale increase on
existing road, port, airport and power capacity will present
Given Indonesia's burgeoning middle class, the consumer
sector has long been regarded as being full of opportunity. The
share of GDP represented by consumer spending is relatively
high in comparison to other parts of Southeast Asia and is a
reason why Indonesia has for some time been on the radar for
companies looking to expand in the retail and food and beverage
Chief operating officer and head of legal &
execution – SE Asia, CLSA Capital Partners
T: +65 6512 2359
M: +65 9788 6870
Originally based in the UK, Wayne Palmer has spent
over 10 years in Asia, initially with global law firm
Clifford Chance, moving to CLSA Capital Partners in
While at Clifford Chance, he focused primarily on
equity and quasi-equity investment work for financial
investors with a particular focus on Indonesia and
India. He has spent time living in Jakarta. Since
moving to CLSA Capital Partners, he has been primarily
covering South East Asia, China, India and Australia
with responsibility for the operational, transactional,
fund raising and regulatory compliance support to
multiple, cross-sector private equity and hedge funds.
Palmer has extensive Indonesian transactional
experience across multiple sectors.