2008-2009 DATA CONSULT. All rights reserved.
INDONESIAN COMMERCIAL NEWSLETTER
August 2011

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INFLOWS OF FOREIGN DIRECT INVESTMENT STRONGER TO INDONESIA


The entire world is still facing great uncertainties until early 2012.  Recession is a potential threat like an epidemic from Europe, which is beset by debt crisis.  The Euro zone is still struggling to wriggle itself out from the crisis to which a number of countries such as Greece have fallen victim. Strong regional economies like Germany and France have worked together since 2011 to lift the Europe from the crisis, but the problem is more complicated with the recent trade embargo against Iranian oil, one of the largest suppliers of oil to that region.

Amid the gloom that surrounds the world's economy, Indonesia is entering the year 2012 with high optimism. The country's economy is expected to continue to expand propped up mainly by big domestic market, healthy macro economic fundamentals and political stability.

The international confidence in the country's economy is shown by the recent upgrading of the country to investment level by international rating agencies including Fitch Ratings and Moody's Investors Service. The country regained the investment grade it's lost in 1997 when its economy was driven to near bankruptcy by regional monetary crisis. Fitch ratings raised the country's sovereign debts to BBB- from BB+.

The country is considered to deserve the status after recording steady annual growth of more than 6% in the past two years, in addition    to success in keeping the debt ratio to its GDP below 25% and healthy banking industry. It was all seen as an extraordinary achievement amid the devastating global crisis.  The success in regaining the status is noteworthy as it came when many other countries including major industrialized economies like Italy and France are downgraded.

The status of investment grade is given to a country  having low investment risk  such as possibility of default, strong economic fundamentals, solid political stability and healthy financial management, which is marked by low budget deficit and  debt  service ratio,  and success in keeping inflation under control.

The success is important as it would change the global perception of the country's economy and is expected to serve as a big boost for investment growth in Indonesia.

Indonesia, which was already placed among the favorite investment destinations, is expected to attract more investments. It now depends on the government to direct the investments to long term ventures in the real sector that they would contribute more to the country's economic development.
Bank Indonesia has said the country is attractive not only to foreign portfolio investment but also to direct investment (FDI).  Since 2008, the country's balance of payments has shown an increase in FDI from year to year. The trend is expected to continue through this year with a higher rate especially after the investment grade status.

In 2009, according to the country's balance of payments, FDI reached US$ 4.88 billion not up to 50% of portfolio investment of US$ 10.48 billion. In 2010, FDI grew strongly to US$ 13.37 billion coming closer to portfolio investment of US$ 15.71 billion. It was estimated that in 2011, FDI exceeded portfolio investment.

In the first quarter of 2011, FDI which reached US$ 4.79 billion already exceeded portfolio investment, which totaled only US$ 4.11 billion. In the second quarter, however, the gap was wider with FDI rising only to US$ 5.25 billion as against portfolio investment climbing higher to US$ 6.28 billion.

The favorable economic condition and good business prospects are strong magnets for FDI.  Foreign capital has continued to flood the country attracted by strong economic fundamentals and high investment return.

In the second quarter of 2011, foreign capital invested in shares and sovereign bonds reached US$ 6.3 billion including.

Increase in FDI in Indonesia is shown in the figures of foreign investment (PMA) project implementation as reported by BKPM.  Since 2007, increase has been recorded in the implementation of PMA projects in the country with a decline recorded only in 2009 when the global financial crisis was at its worst. In 2010, the growth was recorded again when most countries were still haunted by the impact of the crisis. The country's economy expanded by 6.3% in 2010.

Bawono Kumoro, a researcher from The Habibie Center, an economic and political think tank, said another factor giving greater optimism to Indonesia is the rapid growth of the country's middle class in the past five years. The middle class has been one of the biggest drivers of the country's economic growth. The middle class' consumption accounted for 70% of the economic growth.
The latest report of the World Bank, "Global Development Horizons 2011 Multipolarity: The New Global Economy," placed Indonesia in the ranks of world's economic growth drivers until 2015 together with Brazil, China, India, South Korea and Russia. The World Bank said six new economic powers would contribute more than 50% to the world's economic growth.

The growth drivers of the six economies are not the same. China and South Korea are driven by high exports; Brazil and Indonesia are driven mainly by strong consumption, which is attributable mainly to the middle class.

World Bank's chief economist Mansoor Dailami said consumption sector grew with the growing middle class in developing nations. Dailami said developing economies have contributed more significantly to the world's economic growth.
Countries having population dominated by young and more productive middle class will have higher level of consumption than those with population dominated by old and less productive people. Middle class grows faster in Indonesia compared to many other countries. Based on data at the World Bank, in 2003, middle class people made up 37.7% of the Indonesian population. In 2010, the percentage rose to 56.6% or 134 million.

The country, however, still has a lot of hurdles to be removed to remain on the right track to go through the year 2012 with another strong growth of at least 6%. The global crisis is not yet over; it is still a potential threat. Weak Europe means weak demand for the country's commodities in that region.

Overheating that could trigger high inflation, is also a threat if the government does not maintain prudence in the economic management. High FDI will increase demand from the industrial and consumption sectors. Limited production capacity is feared to cause imbalance between supply and demand in the domestic market.

However, a number of agencies including Bank Indonesia dismissed fear overheating saying the country's economic growth is not even up to 7% yet.

Bank Indonesia said credit growth of 25%-26% in 2011 would not cause an economic bubble. It is normal that credits grew above 20% in an economy that expands 6%, it said. The central bank also said the cut in its key rate to 6% would not immediately result in fall in the lending rate and a surge in credits.

With the relatively good performance amid the global uncertainties in the past few years, Indonesia has strong reason to be optimistic in entering the year 2012.

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