2008-2009 DATA CONSULT. All rights reserved.
INDONESIAN COMMERCIAL NEWSLETTER
January 2010

FOCUS

MAINTAINING MOMENTUM TO ATTRACT FOREIGN INVESTORS


Backgrounds 

Indonesia, China and India - were the only developing economies in Asia managed to chalk up positive growth in the past two years amid the global financial storms which have crippled economic super power   the United States. A financial giant the Lehman Brothers, which was the fourth largest investment banking company in that country collapsed and announced its bankruptcy in September 2008 after failing to meet its financial obligations.

The US financial woes spread rapidly like pests to become a global crisis taking tolls in all related sectors in both developed and developing nations. Major countries including the United States the European Union and Japan spend hugely on banking bailout in a bid to curb and isolate the crisis as many banks had also collapsed to follow the demise of the Lehman Brothers.

After almost two years now since its peak in the middle of 2008, the crisis has not ceased to pose a threat.  Currently, a number of European Union countries such as Spain, Portugal and Greece, notably the latter are struggling to lift themselves from financial woes that pose a new potential threat to the world financial system.

Under such condition, more investors turn to countries relatively safe from the crisis like China and India. In the past two years, foreign funds have flowed strongly to the two countries funneled into both the capital market and the real sector as direct investment. High foreign direct investment has even feared to cause economic overheating in China. There are already worries that China may face bubble economy prompting many investors to look for a safer place for investment.

Indonesia, which has been out of favor compared with the two Asian giants, might   now fit their expectation. With an economic growth of 4.5% in 2009 exceeding the previous targets of government and analysts proved that the country has succeeded in maintaining strong stability.  In addition, the country's inflation was low, the rupiah was gaining and its foreign exchange reserve increased in 2009 all contributing to investor's confidence in the country.

After the crisis, foreign funds have flowed more to the capital market with a small to the real sector.  It is shown in the rising trend of the composite share price index of the Indonesian Stock Exchange. The index has hit a new record high at 2,500 points. Strong economic fundamentals allowed the Index to lift itself from the global financial pressure since the first quarter of 2009. At the end of March, 2009 the Index   already hit the level of 1,500  and it continued to scale up to reach the level of 2,500 in October  2009.
Market players said with the economy continuing to grow and the performance of listed companies remaining solid, the Index would continue to rise inching closer to the level of 3,000 by the end of this year. However, the political temperature has remained high after the presidential election, which had been praised to be highly successful. The peaceful climate after the presidential election was short-lived.  The enmity between the Police department and the Corruption Eradication Commission (KPK) triggered politically motivated row that continued to heat up with the Bank Century case. The unfavorable condition caused a setback in the market.

The success in attracting foreign capital to the capital market has little contribution to the revival of the real sector.

In 2010, Indonesia has greater opportunity to attract foreign investors as it has proved it is has the strength to keep stability largely thanks to its large domestic market. The domestic market has become the driving motor for the country's economic growth.

A number of Japanese companies have moved their factories to Indonesia including their factories from other countries in Asia. Growing number of South Korean companies have invested or planned to invest in Indonesia. They even increased investment in Indonesia when the global crisis was at its height because they see it was safe to invest in the country. 

The opportunity is open the wider for Indonesia to attract foreign investment. The government should not miss and fail to utilize the good momentum.

Development of Investment in Indonesia

In fact, many foreign investors have begun to show interest in Indonesia in the past three years. Foreign direct investment (FDI) projects increased both in number and value. However, the global financial crisis has caused a severe setback and the impact was still felt in 2009.  FDI shrank in value although increasing in number of projects.

In 2006, there were 869 foreign investment projects valued at US$ 5.9 billion - up to 982 projects in 2007 and to 1,138 projects in 2008 with value at US$ 19.24 billion and US$14.87 billion respectively.  In the first three quarters of 2009, FDI rose in number to 1,221 units bur fell in value to US$ 10.82 billion.

The investment projects did not include investment in the oil and gas sector, financial sector (banking, non banking and insurance) and mining sector under working contract.

Meanwhile, domestic investment has fluctuated in the past three years and is still below the level recorded 12 years earlier before the monetary crisis hit the country in 1998.

Realization of investment in 2009 down

In 2009, the transport, warehousing and communication sector led in realization of foreign investment. FDI in that sector was valued at US$ 4,170.3 million. This sector has been a major contributor to the country's domestic trade and telecommunications sector remained brisk in 2009.

In the manufacturing sector, chemical and pharmaceutical industry led with FDI   valued at US$ 1,183.1 million, followed by automotive industry with investment valued at US$ 756 million.

In 2009, Singapore led foreign countries in FDI  in Indonesia. Its investment rose in 2009 from the previous year. In 2008, its investment was valued at US$ 1,487.3 million up to US$ 4,341 million in 2009.  Much Singaporean investment turned to Indonesia when the global financial crisis badly hit Singapore as well as Malaysia, both export oriented. Indonesia, which more oriented to its huge domestic market  fared much better in 2009.

Japan was also badly hit by the global crisis forcing it to cut investment in Indonesia. In 2008, FDI from Japan was valued  at US$ 1,365.4 million, down sharply to US$ 678.9 million in 2009. 

Now the Japanese economy is on the way to recovery . Japanese investment, therefore, is expected to increase in Indonesia. Japan has long been the largest investor in the country.  Trade Minister Mari Elka Pangestu said Japan has listed six areas in the country to be developed as economic corridors and has studied plan to build infrastructure needed to develop economic potential in the areas. 

Mari said the areas are located in eastern Sumatra and  northwestern Java, northern Java, Kalimantan, western Sulawesi,  East Java and Bali  and Nusa Tenggara, Papua.

She said a number of major Japanese companies planned to move their production operations to Indonesia  this year. Panasonic plans to move its factory  producing energy saving lamps  from Osaka to Pasuruan, she cited.

South Korea, which is also a major investor in Indonesia increased its investment in Indonesia to US$ 624.6 million in 2009 from only US$ 301 million in 2008  when  a setback was recorded in the value of its investment in the country.

The Netherlands, which is also a major investors in the country invested mainly in the hotel, textile and metal sectors in 2009.

Conclusion

Currently Indonesia is in a good position to woo more foreign investors as it has shown remarkable resilience facing the world economic turbulence. After racing to invest in China and India, now there are fears of overheated economy especially in China.

Fears of bubble economy in China, foreign investors began to think twice before embarking on large investment in that Asian giant. They began to look for alternative place and Indonesia looks to be the best choice. In fact, many investors have returned to Indonesia since 2009.

However, it is not as if everything has gone to the country's favor. Economic stability and strong growth are not enough to attract investors. Indonesia needs to improve its infrastructure including power supply, ports and highways - all still below standards for investors.  In addition, political squabble continued to heat up with the former Bank Indonesia governor now vice president and the finance minister in the center of big controversy over Bank Century bailout.  The market is apparently not happy with the condition despite the good reputation of being the best international reputation accorded on the country's financial authority notably in protecting stability. The reputation has been badly dented by the involvement of the two key figures the Bank Century case mired in corruption charges.

The Susilo Bambang Yudhoyono administration has to be more prudent in handling the situation especially with the growing threat of a break up of the coalition government. Political conflicts have  to be  sorted out to prevent it from undermining efforts to bring the economy to full recovery. Stability is absolutely necessary  to attract foreign investors needed by the country to shore up economic growth.


See list of contents>>
MONTHLY REPORT
INDONESIAN COMMERCIAL NEWSLETTER (ICN)
Related Topics

ICN - January 2010


FOCUS: MAINTAINING MOMENTUM TO ATTRACT FOREIGN INVESTORS

INDUSTRY PROFILE: PROSPECTS AND OPPORTUNITY OF INVESTMENT IN INFRASTRUCTURE 2010

INDUSTRY : DEVELOPMENT OF RAILWAY INFRASTRUCTURE
HOME            Head Line            Focus            List of Contents          To Subsrcibe   
Web Page Maker, create your own web pages.