Standard & Poor’s recently upgraded Indonesia’s credit rating to investment grade, spurring hopes of additional investment worth billions of dollars into Southeast Asia’s biggest economy. Lawyers talk about the potential impact of the upgrade, as well as the sectors that are hot at present.


In May this year, rating agency Standard & Poor’s (S&P) upgraded Indonesia’s sovereign credit rating to investment grade, marking the first time since the 1997 Asian financial crisis that the country’s sovereign bonds had that rating from all three major credit ratings agencies. Fitch upgraded Indonesia to investment grade in December 2011 and Moody’s followed suit in January 2012.

The upgrade was well received in Indonesia, with President Joko Widodo –popularly known as Jokowi – describing it as “very important.” According to Reuters, the main stock index in Jakarta went up more than 3 percent after the S&P upgrade – the biggest intraday percentage rise since October 2015 – and gained 2.6 percent for the day. The rupiah currency also rose and Indonesian dollar bonds rallied.

The S&P upgrade was due to a number of factors, including Indonesia’s recently concluded tax amnesty programme – said by many to be the world’s most will stimulate investment decision of domestic and foreign investors either by means of stock market, banking financing, or corporate funding.”

According to Ayik Candrawulan Gunadi, a partner at ABNR, there is now cautious optimism that the lift to investment grade will help attract a certain class of global investment funds which has been closed to Indonesia so far.

“There are strong indications consistent with the World Bank, Goldman Sachs and other global investment predictions that by reaching investment grade, Indonesia may potentially unlock a new source of infl ows – particularly from Japan – that could amount to between $3 billion to $5 billion over the next year,” says Gunadi. “In the few months since the upgrade, we have already seen a great deal of activity and interest, fl owing particularly from major Singaporean, Japanese, Korean, and European investors and companies.”

Among the challenges faced by foreign investors in Indonesia today are complex paperwork, bureaucracy and unclear regulations, notes Marcia Wibisono, partner at Yang & Co. “With this new status, the government has expressed its commitment to build trust and attract foreign investors to enter into business in Indonesia,” she says. “In our experience, there has been an increasing interest from foreign investors in entering into our country.”


Indonesia attracted foreign direct investment worth 396.6 trillion rupiah ($29 billion) in 2016 – 8.4 percent above the 2015 total. Metals, machinery and electronics, chemicals and pharmaceuticals, paper and printing, and mining and transport were among the biggest recipients.

The 2016 figure, however, excluded investment in banking and the oil and gas sector. “FDI growth is attributed to a set of economic policy packages that was implemented by the Indonesian government between September 2015 and November 2016,” says Schinder. “The government has introduced 14 stimulus packages mainly focusing on deregulation, law enforcement and business certainty, interest rate tax cuts for exporters, energy tariffs cuts for labour-intensive industries, tax incentives for investment in special economic zones and lowered tax rate on property acquired by local real estate investment trusts.”

Wibisono observes that while investors always show interest in sectors like mining and energy, plantations and financial services, the fastest-growing sectors over the past three years have been railways, land and air transportation, electricity, and manufacturing of food and beverages.

“Even though mining has declined significantly in recent years, it is still the favorite sector for investors,” she says. “To increase the investment in mining sector and in order to increase economic growth, the government has now redefined several main provisions on minerals and coal mining.”

She also points out that the manufacturing industry is the largest contributor for Indonesian economy. AKSET’s Tisnadisastra adds that the government has set a list of investment priority sectors, where infrastructure remains the main theme for the years to come. “Other sectors listed in the list include agriculture, maritime and tourism,” shares Tisnadisastra. “In addition, we have also seen recent strong interests in healthcare, real estate and e-commerce & IT sectors.”

According to Gunadi, investment interest in Indonesia is heavily influenced by the Negative List, under which the government determines particular business lines to be closed or partially closed to foreign investment. “The government has shown an encouraging trend towards liberalisation through the latest iteration of the list in 2016, which eased some of the restrictions across a number of key sectors in energy and mineral resources, transportation, pharmaceuticals and manufacturing.”

He continues, “Power-generation industries were among those opened to allow for greater percentages of foreign ownership, and accordingly, we continue to see significant activity from investors in coal, oil, and gas projects in particular. There is also noticeably more interest around Indonesia’s capacity in the renewable sector, reflecting the global trend towards growth in these industries.

He notes that importantly, the government has indicated that it will issue a revised Negative List this year. “One key sector that may benefit is the airport industry,” says Gunadi. “The Transportation Ministry has stated an intention to revise the current ownership restrictions in airport management to boost services in that field, in which case airports could offer a promising new attraction for foreign investment within the next year or so.”


In an interview with Reuters last month, Jokowi said the government would ease foreign ownership restrictions on certain industry sectors in August. He added that following the S&P upgrade, Indonesia was hoping for additional infl ows worth $10 billion from pension funds and other institutional investors over the next two years.

Ministers have been tasked with marketing the country aggressively to investors such as Canada Pension Plan and Japan’s Government Pension Investment Fund.

In a bid to help the country win these additional inflows, Indonesian state firms are now aiming to get big international pension funds to buy their securities backed by future income of infrastructure assets, according to another Reuters report.

Under a securitisation model, a company typically issues a trust-like investment structure that is backed by future revenue from a project or an asset, with investors earning a certain rate of return. “The essential background to this policy is that Indonesia is currently pursuing ambitious targets including plans to build up to 5,000 kilometres of railway tracks, 1,000 kms of toll roads, 24 seaports and 35,000 megawatts of power plants,” says Gunadi of ABNR. “To realise this strategy will require investment of more than 5 quadrillion rupiah ($374.76 billion) between now and 2019.”

Indonesia’s biggest toll road operator, PT Jasa Marga Tbk, for example, has begun working to securitise about half of the 4 trillion rupiah ($298.4 million) in revenue expected over five years from a road linking Jakarta to cities in West Java province, said Reuters.

The securities – expected to offer annual returns of 8 to 9 percent over five years – have received a positive initial response from potential investors including pension funds. Similarly, state-controlled electricity firm Perusahaan Listrik Negara (PLN) is issuing securities backed by the projected income from a power plant.”

Lawyers, however, are not convinced on how effective the securitisation plans will be. “The initiative from the government to attract additional inflows capitalising on Standard & Poor’s recent credit rating upgrade to investment grade needs to be appreciated. However, we note that the effectiveness of this investment structure can vary greatly,” says Tisnadisastra of AKSET.

He adds, “Given the huge needs for infrastructure investment, this type of investment structure could potentially fill the gap. However, there will be challenges as this type of investment structure issued by state-owned companies is relatively new, it may not create immediate appetite to investors. Most investors including pension funds may opt to wait and see before making their decision to invest. In addition, further regulatory support may be required to create more certainty about this type of investment.”

From an investors’ perspective, this involves high risk and low returns, according to Wibisono of Yang & Co. “Although the idea itself is promising and the infrastructure projects in Indonesia are booming, the fact is that the infrastructure investment scheme announced by President Joko Widodo is quite new in Indonesia. And from a financial point of view, the returns are not that significant, not to mention the long term period,” she says.

“Given the above fact, it seems that most of the pension funds companies will prefer to allocate funds to safer instruments.”

Schinder of Schinder Law Firm points out that the pension funds would not be invited to invest in brand-new projects, or those that are being constructed, but only in those that already generate income. “This would make the investment less risky for the investor,” she says. “Therefore, to court foreign pension funds is one of the effective solutions to provide funds for the infrastructure projects. However, the state’s debt would also increase, and the challenge for the government is to ensure all infrastructure projects run smoothly.”


As Indonesia moves to update its regulations to draw more investment into the country, lawyers are seeing a steady stream of work. “We find ourselves busy with many cases, mostly related to government infrastructure and mega projects,” shares Schinder. “The main concern of foreign investors is the government’s consistency in improving regulations and securing the implementation of such new regulations.”

According to Tisnadisastra, his firm is busy helping clients understand legal requirements that are relevant to their investment/proposed investments. “Clients must be aware that other than formal regulations, assessment on informal policies and practical approach is necessary,” he shares. “We also advise clients on potential exposure related to their investments/proposed investments so they are able to make the right decision and, if possible, to have a clear plan on how to mitigate the risk. At the moment, our firm is busy handling M&A transactions in various industries, project financings, energy and power related investments, real estate transaction and other matters.” 

Most clients that approach Yang & Co. are seeking creative and effective legal strategies to help them pursue their goals in doing businesses in Indonesia, says Wibisono. “We are not just drafting contracts or reading any regulation and advising what to do and what is prohibited,” she says. “We offer solutions to guide a client’s business through unfamiliar situations and help the business to succeed. We have advised mining companies, plantation companies, oil companies, insurance companies, banks, financing companies, and so on. Recently, we have been busy with works related to real estate, project finance, and F&B.”