27 5月 2024
Insight
As Southeast Asia's largest economy and the world's tenth largest in terms of purchasing power parity, Indonesia is on a trajectory to become a significant global economic player, with the government aiming to achieve top five global economy by 2045.
To help achieve this, the Indonesian government is now fast tracking an OECD membership application and has been proactive in implementing reforms to attract foreign investment and ease the process of doing business. With its youthful population approaching 300 million and abundant natural resources, Indonesia increasingly presents a compelling investment opportunity for businesses.
Here we outline the top trends for investment in Indonesia:
1. Growing Economy and Middle Class
Indonesia is Southeast Asia's largest economy and the world's tenth largest in terms of purchasing power parity. It has a large and growing middle class, which is a significant market for businesses. The government aims for Indonesia to become the world's fourth largest economy within the next 20 years.
2. Infrastructure Development and Diversification
To meet its economic objectives, Indonesia needs significant infrastructure development. The economy has diversified greatly, and the government has focused on improving the country's infrastructure. Sectors with positive investment prospects include the digital economy, financial services, consumer sector, manufacturing, and healthcare. Whilst private capital tech-sector investment has slowed down since 2023 reflecting a global cooling down of tech company focus amid increased focus on investment return, over the last two years, we have seen PE and VC successfully deploying capital in a broader range of more defensive sectors in Indonesia, including consumer, industrial, healthcare, financial services and infrastructure (in particular toll roads).
3. Easing of Foreign Direct Investment (FDI) Restrictions
Over recent years, FDI restrictions have eased, and most business lines are now open to foreign investment. However, there are exceptions, including sectors closed to both domestic and foreign investment, businesses partially open to foreign ownership, and additional requirements for foreign investors partnering with small or medium-sized enterprises.
4. Regulatory Reforms and the Omnibus Law
The Indonesian government has enacted the Omnibus Law and other regulations to improve the ease of doing business. The Omnibus Law reformed many aspects of the country's governmental, regulatory, and planning systems. A significant change was the adoption of a risk-based licensing system to streamline licensing applications.
5. Private capital optimism
In the past Indonesia may have been seen as “too hard” for some Private Capital investors relative to other large Asian markets where ticket size (and potential upside) is larger. This is now starting to change given the change in geopolitics in recent years and Indonesia’s sustained rise as a stable and investable market. There have been numerous examples of successful entries (and more importantly, exits) by global PEs, and so we are optimistic about Indonesia in the years ahead as a PE investment destination.
6. Challenges remain as targets still early in their evolution
Although there is a lot of interest, to successfully deploy capital (and exit) requires experience and deep experience in this market, given the complexity of the market and regulatory framework in some sectors of the Indonesian market. On top of language barrier challenges, particularly with smaller targets, many targets are relatively early in their evolution which can mean finding sizeable targets who need the investment and are willing to subject themselves to the “discipline” expected by PEs can be challenging.
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The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2024
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