President Joko Widodo of Indonesia on 11 July 2017 signed a “regulation in lieu of law” granting himself powers to ban hard line groups, and on 19 July the government banned an Islamist organisation.

These actions have underlined how a proxy political contest in Indonesia has become falsely conflated with a battle between Islamism and tolerance. Investors must see this tussle for what it really is, and respond to the appropriate threats, or risk missing out on the significant opportunities in Indonesia.

Political Outlook – A Proxy Contest

The new rules empowered the government to proscribe organisations for opposing Pancasila, a tolerant doctrine that has underpinned the Indonesian state since independence. Security Minister Wiranto then banned Hizb-ut-Tahrir, an Islamist, but non-violent, organisation.

The overt rationale for the action was the rising tide of Islamism – a concern to be sure, but one that is often exaggerated. More important was the President’s determination to respond to the ouster of the Governor of Jakarta, Basuki Tjahaja Purnama or “Ahok”, an ally of Widodo now in jail for defaming Islam.

The government seemingly saw the multinational, Islamist organisation Hizb-ut-Tahrir as an outsider in a loosely aligned network that sought to weaken Widodo, and which counted amongst its members former General Prabowo Subianto, former President Susilo Bambang Yudhoyono, and the extremist, home-grown, Islamic Defenders Front (“FPI”).

This proxy battle poses risks. The divisive climate could nurture nativism, and in time may erode the rule of law – particularly if any tit for tat undermines the Widodo government’s improvements to the investment climate. Any decline in the rule of law would have an especially big impact in the regions, where standards are already weak. In reality, an upsurge in Islamism is a secondary threat.

Economic Outlook – Cautious Optimism

For now, the economy has shrugged off these risks. Admittedly, foreign investment rose only 0.9% year-on-year in the first quarter of 2017, as investors fretted about religious intolerance on top of longstanding concerns about regulation, debt, and, of course, graft.

Yet GDP rose 4.9% year on year in the first quarter of 2017, and foreign exchange reserves reached USD124.9 billion in May 2017. Indonesia for the first time in May 2017 won an investment grade rating from all three of the major ratings agencies.

Real opportunities exist in infrastructure, private consumption, and real estate. The government is attracting investment by securitising revenues from toll roads, consumer confidence is at its highest since 2000, and real estate prices in Jakarta have risen to giddy heights.

How to Manage the Risks to Foreign Investors?

The trick for investors, then, is to watch for any worsening in the status quo, and to manage the fallout from Indonesia’s somewhat grubby politics, protectionist policies, or regulatory shortfalls – but not to overreact to a rising tide of Islamism.

In the real world, none of these threats are insurmountable, but they do make investing in Indonesia more complex. A failure to act pre-emptively, though, could seriously damage a company’s business in Indonesia, or even its global reputation. In that context, SVA believes companies should take the following steps:

New investors should assess political uncertainties at both the national and local levels, and carry out a real-world, independent, audit of their vulnerabilities. SVA can prepare reports on political, economic and regulatory risk. Armed with this information, businesses should then examine strategic plans, so as to gain a better understanding of prospective vulnerabilities.

Investors with existing interests in Indonesia should also carry out investigative due diligence research into counterparties, not least as many prominent businesses operate through straw men, act inappropriately, or bear political liabilities. A failure to do so could leave investors exposed to regulatory action. SVA can help clients gain a full understanding of whom they are dealing with.

Businesses with an in-country operation should also ensure that global oversight of the local operation is sound, and not reliant on the say so of local employees. Investors must also respond quickly to problems, such as corruption investigations, discriminatory regulatory actions, or staff defections, as they arise. SVA can assist in reviewing systems, carrying out investigations, and preparing an appropriate response.

How SVA can help

SVA (www.stevevickersassociates.com) is a specialist risk mitigation, corporate intelligence and risk consulting company. The firm serves financial institutions, private equity funds, corporations, high net-worth individuals and insurance companies and underwriters around the world.

SVA is in a strong position to help investors understand the nature of the risks in doing business in Indonesia, and in Asia as a whole. Please do not hesitate to contact us at the numbers below or via e mail to [email protected]