Jakarta Governor Joko Widodo delivers a speech in Malang on March 30, 2014. (Aman Rochman/Getty)
Two years ago, Indonesia was one of the hottest markets in Asia for international law firms, who saw opportunity in its natural resource wealth, rising middle class and investment-friendly regime.
Now, the picture is a bit cloudier. A drop in demand from China has hit Indonesia’s resources sector hard, and the political environment has shifted in a more nationalist direction as a presidential election looms. As a result, firms say clients weighing investments in the country are holding off, waiting to see if things change after the election in July.
“If I can make my investment in August as well as May, then why not wait until August?” says Shamim Razavi, a senior foreign legal counsel with Norton Rose Fulbright, who works out of the Jakarta office of associate firm Susandarini & Partners.
Government figures for the first three months of the year show that foreign investment rose 9.8 percent from the same period last year, a significant drop from the 25.4 percent growth seen in the last quarter of 2013. Falling commodity prices slowed growth of the overall Indonesian economy to 5.8 percent last year, down from 6.2 percent in 2012 and 6.5 percent in 2011. Figures for the first quarter of this year showed a still-lower annualized rate of 5.2 percent. The slump in exports of iron, copper, gold and bauxite caused the Indonesian rupiah to fall 21 percent from its 2012 value.
For foreign companies operating in Indonesia’s resources sector, a potentially greater concern than falling commodity prices has been a shift in government policy. In January, a ban on the export of mineral ore and a tax on the export of mineral concentrate were introduced as a way of forcing mining companies to build smelters and other processing facilities in Indonesia.
According to Reuters, the ban has led ore exports to fall by some $500 million a month since the beginning of the year. U.S. mining giants Freeport-McMoRan Copper and Gold and Newmont Mining Corp., which together account for 97 percent of the country’s copper output but have no significant processing facilities there, are currently negotiating with the government over the ban. Newmont has said it will halt production at one of its Indonesian mines early next month until it reaches an agreement with the government that would allow it to export again.
Sidley Austin Singapore partner Matthew Sheridan says the ban reflects an economic nationalism that has periodically reared its head in Indonesia, especially around election time. He says that Indonesians feel they should be getting more out of their coal, minerals, precious metals and oil and gas than merely allowing foreign companies to exploit them and then ship them overseas.
“There is an element of ‘you’re talking part of Indonesia and selling it off without adding any value,’” he says.
Many lawyers in the market say they expect the new mining regulations to be softened in time, noting that Indonesia has a habit of pushing aggressive policies and then backtracking. Still, the government’s current approach is markedly different from its more welcoming stance in the past. In 2009, Indonesia’s mining law was revised to allow foreign companies to hold mining licenses alongside domestic ones.
Foreign law firms are not permitted to have offices in Indonesia, but many—including Squire Sanders, Clifford Chance, White & Case, Clyde & Co, DLA Piper and Taylor Wessing—have been attracted enough by the country’s growth potential in recent years to form alliances with domestic Indonesian firms.
Despite recent developments, many lawyers say that potential is still there. The country’s middle class, defined as those with disposable income of over $3,000 a year, continues to grow. The government also continues to invest in new infrastructure, including transportation, power and telecommunications projects, some of which have been in the works for some time.
“It would take a real mess to throw that off track, and it doesn’t look like a real mess is the likely result of the election,” Sheridan says. “I guess the way investors are looking at it is that it’s stable enough no matter who gets in [office] because these are more macro-driven investments.”
What is the election likely to change? The strong favorite to win in July is charismatic Jakarta governor Joko Widodo. Much of the Indonesian public sees him as a crusader against corruption. Many foreign investors see him as a pragmatic leader who will likely moderate some of the more nationalist views within government.
“[Widodo] is a practical guy, and I think that’s certainly how clients you talk with look at it too,” says. “He’s certainly not going to do anything to hurt the economy.”
But not everyone is so sure. O’Melveny & Myers Singapore partner Joel Hogarth, says Widodo’s economic platform remains largely unclear. But Hogarth thinks, on the basis of some of the candidate’s previous public statements and the stance of his party, Widodo may have nationalist tendencies of his own.
“Ideologically I think he probably believes Indonesia’s resources are for Indonesia,” Hogarth says.
Whatever Widodo’s views, though, lawyers are sure that the political environment for foreign investors will change if the commodities sectors starts booming again.
“Has [the mineral export ban] aggravated us further? For sure,” says David Zemans, Milbank, Tweed, Hadley & McCloy’s Singapore-based Asia managing partner. “If there was a bounceback in commodity prices, then people would be willing to go back in, and I’m confident a workable solution to the currently regulatory challenges will be found.”
Sidley’s Sheridan agrees. “This will get sorted out when the commodities sector comes back because demand increases,” he says. “People in Indonesia will see there’s value in having foreign capital come in and expand the commodities sector again.”