T

he influx of foreign funds to Indonesia has begun to move to long-term investment including foreign direct investment (FDI), easing risk of a sudden reversal, a Bank Indonesia (BI) official says.

“Although portfolio [investment] remains dominant, FDI continues to improve. Long-term capital inflows increase, so pressures of reversal lessen,” BI spokesman Difi A. Johansyah told a press briefing at his office in Jakarta on Tuesday.

According to BI data, FDI rose nearly 17 percent to US$2.9 billion in the first three months of this year, up from $2.48 billion. Separately, foreign portfolio investment (FPI) decreased to $3.56 billion from $6.1 billion.

BI Deputy Governor Budi Mulya forecast this trend late last year when he announced the central bank’s projection that capital inflows to the portfolio market would drop to $11 billion this year, compared to $15.7 billion last year, while foreign direct investment would be higher, at $16.7 billion in 2011 compared with $13 billion in 2010.

“There’s a change in the characteristic of inflows to Indonesia. From 2008 to 2010, inflows were dominated by short-term investment. Now it’s beginning to be seen that inflows are starting to enter the FDI, as indicated by surging investment loan growth,” Difi said.

Investment loans increased 29 percent on a year-on-year basis as of May this year, while loan growth was down to 23.4 percent in June, BI data shows. Investment loan growth was faster than consumer loans’ and working capital loans’ respective 17.8 percent and 24.8 percent growth.

“The increase in investment loans is expected to widen economic capacity so it could positively impact economic growth without resulting in overheating in the country’s economy,” BI’s second quarter monetary policy report states.

Increasing production capacity would also tackle inflationary pressures, as supply would be ensured to meet the surging demands amid rapid economic growth, Difi said.

Indonesia is expected to grow by at least 6.4 percent this year, but the central bank recently upgraded its forecast to up to 6.8 percent due to an improved outlook on the nation’s export and investment
activities.

“We have expected that, in 2011 to 2012, foreign funds would still flow in but mostly in the form of FDI instead of portfolio [investment], mainly due to expectations of an investment grade,” Bank Mandiri chief economist Destry Damayanti said in a telephone interview on Tuesday.

Indonesia is poised for an investment grade sovereign credit rating after top international agencies Moody’s Investors Service, Standard & Poor’s and Fitch Ratings upgraded the country’s rating earlier this year for a review of a possible upgrade.

According to Bank Mandiri’s survey of 33 countries that have been upgraded to investment grade, Destry said, portfolio investments flowed in when expectations of investment grade first arose last year, as investors were expecting better prospects in the countries’ markets.

“But an investment grade ensures lower cost of money, so [direct] investment would surge afterward” she added.