What are the main risks to invest in Bali?
Our Top 15 risks and reasons for failure for foreign investors in Bali:
- Overreliance on Tourism can be a risk as we pointed out already: Relying solely on the tourism industry without diversifying investments can make businesses vulnerable to fluctuations in tourist arrivals and global events (e.g., pandemics, natural disasters). Therefore one needs to be prepared that some of these disasters might strike and adjust particularly the financial back up and cash-flow management accordingly.
- Regulatory Complexity: Navigating regulations and bureaucratic processes in Indonesia can be challenging for foreign investors who don’t know their way around. But it can be done. And it can be done properly if one does not fall into the tempting trap to try to avoid taxes or circumvent regulations and laws.
- Land Ownership Restrictions: Foreigners are limited in their ability to own land in Indonesia, which can complicate real estate investments and require careful structuring.
- Cultural and Language Barriers: Understanding and respecting the local culture is vital. Failure to do so may lead to miscommunication, misunderstandings, reputational damage, high staff turnover etc.
- Infrastructure Challenges: Bali’s infrastructure, such as transportation and utilities, may not meet the demands of a growing economy, impacting business operations in certain areas. Urban planning is still a problem. And a nice villa next to a ricefield might find itself next to a beach club a few years later.
- Environmental Vulnerabilities: Bali faces environmental issues like waste management and water scarcity. Ignoring sustainability practices could lead to negative consequences for businesses and the environment, which would undoubtedly affect tourism.
- Competition and Saturation and Failure to Adapt: The competitive nature of the tourism sector may result in oversaturation and price wars, affecting profit margins. rest assured, what ever you can do well, somebody will most likely do it better at some point and become your competition. Businesses within the tourism sector need to stay agile, flexible and adapt to new trends and demands. Being resistant to change and not adapting to market trends can end up badly.
- Currency Fluctuations: Bali’s economy is somewhat sensitive to changes in currency exchange rates, which can impact investment returns, especially for foreign investors.
- Labor Costs and Skill Shortages: Even though wages are relatively low, Finding skilled labor at reasonable costs can be challenging, particularly in specialized industries. So one needs to anticipate that labour costs will steadily increase every year, which is not a bad thing considering that so many people still work at very low wages; but can be risky for investors who calculate “too tight” and are in a competitive environment where adjusting the prices of their services would be difficult.
- Seasonal Business Cycles: Many businesses in Bali experience seasonal fluctuations, particularly the more remote areas; and investors must plan for potential lean periods.
- Political and Economic Stability: Changes in government policies and economic conditions may affect business operations and investor confidence. Regulations can be passed by the central government and to a certain extend by the local government (Bali Governor). These two forces also don’t always “want the same thing or outcome”.
- Corruption and Bribery: Even though Indonesia has cleaned up significantly,and many governmental processes are now online and much more transparent, Investors must be cautious about corruption and bribery risks that can impact business practices. Don’t do it.
- Natural Disasters: Bali is susceptible to earthquakes, volcanic eruptions, and floods due to heavy rains in certain regions, which can disrupt businesses and impact infrastructure.
- Lack of Due Diligence and Inadequate Market Research: Insufficient research and due diligence on investments and business partners can lead to unexpected risks. Location, Location, Location. You need to know and understand the area well, where it is and where it is heading. “I always wanted to open a Cafe” might not be enough of a background to actually run one. Entering a market without a thorough understanding of customer preferences and demands can result in failure.
- Unrealistic Financial Projections: “UNDERFINANCING”. Overly optimistic financial projections may lead to poor financial planning and sustainability issues and can impact your cashflow drastically which in Bali, can become a nightmare rather quickly.
To avoid these risks and mistakes, investors should conduct thorough market research, engage with reputable legal and financial advisors, understand the local business environment, and be prepared to adapt their strategies based on changing circumstances. Investing in Bali can be rewarding, but it requires careful consideration and a well-informed approach to navigate potential challenges successfully.
We have seen dozens if not hundreds of businesses come and go over the last 20 years. While in any economy businesses fail and succeed, a good understanding of the opportunities and risks is essential.
The natural disasters such as earthquakes and volcanic eruptions did happen and will happen again, affecting tourism in some regions in Bali or as a destination overall. Even though no challenge lasts forever, the economy can crash for a few months and investors need enough resources to be able to handle such incidences, and manage cash flow. Bear in mind, that competition can be tough in all hospitality segments, there are constantly new places opening and the level of innovation and creativity of business owners is at times mind-blowing. Cash-flow management seems to be for many “inexperienced” investors a huge challenge, simply because they underestimate the tax bills, or are not aware that buying on credit is rarely happening and everyone wants to see the cash before doing anything. High interest rates, of course only if you manage to get a loan from a local bank. Lack of proper legal and fiscal research or listening to shady agents, consultants, influencers and wannabees can ruin any business rather quickly. It is absolutely crucial to build a strong foundation – legally and fiscally. The tax system can be complicated, the rules in general are getting stricter (that’s for the most part a good thing). Building & business permits need to be in place. Gradually, environmental protection requirements are getting stricter, limitations of ownership are a real thing, the requirements to have local shareholders or partners for some industries are mandatory, and you need a solution for the paid-up capital to found a company, and one needs to understand how dividends are taxed and how earnings can be sent abroad if needed. And, last but not least, there are labour laws to follow. Wehave seen business failing simply because of choosing the wrong location and not understanding the cultural differences when dealing with employees and business partners.