Country risk in Indonesia is low to moderate. Indonesia enjoys an investment grade credit rating and an OECD country credit grade of 3. This indicates a low to moderate likelihood that it will be unable or unwilling to meet its external debt obligations in a systemic sense (though, needless to say, individual private and ‘sub-sovereign’ debtors can and do default).
The World Bank’s ease of doing business gauge — which measures regulation and red tape relevant to a domestic small to mid-sized firm—ranks the Indonesian business climate 72nd out of 190 economies, an improvement from the 120th ranking in 2013. But starting a business, paying taxes and enforcing contracts are particularly difficult relative to the regional average.
Risk of expropriation in Indonesia is moderate. The 2009 Mining Law and its subsequent implementing regulations have introduced a raft of measures that impact on foreign investment—including domestic processing and majority-ownership divestment requirements. This is creating tensions with mining investors. For instance, the divestment regulations stipulate that all foreign miners must divest 51% of shares to Indonesian companies by the tenth year of production.
As part of the implementation of the mining law and its implementing regulations, foreign mining companies are closely watching the negotiations between the Indonesian government and Freeport over the future of the Grasberg mine; the world’s second largest copper mine. While Freeport has now publicly agreed to divest 51% ownership of the mine as well as build a copper smelter in Indonesia, the price and timeline of the share divestment remains unresolved.
Political risk in Indonesia is low to moderate, though the growing risk of religious based violence could increase political risks over the coming years. The World Bank ranks Indonesia in the second bottom quartile for all but one dimension of governance. Indonesia lags the regional average on measures around the rule of law, political stability and absence of violence.