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Local firms take lead as FDI slows
Although foreign direct investment (FDI) has fallen to its slowest growth since 2010 in the second quarter of this year, the investment growth target remains on track due to the sharp increase in domestic investments
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Although foreign direct investment (FDI) has fallen to its slowest growth since 2010 in the second quarter of this year, the investment growth target remains on track due to the sharp increase in domestic investments.
In the second quarter of this year, Southeast Asia's largest economy saw a 29.8 percent year-on-year increase in investments, which topped Rp 99.8 trillion (US$9.78 billion).
The strong investment growth was driven by domestic direct investments (DDI), which expanded by an astounding level of 59.1 percent, as compared to 18.9 percent in FDI that is the lowest growth since 2010.
Although foreign investors remain the biggest contributor, now domestic investors already account for 33 percent of Indonesia's total investments, rising sharply from only 27 percent in the same quarter last year.
'There are signs that our domestic industries are taking advantage of our investments boom, which over the last few years, had been enjoyed mostly by foreign investors,' Investment Coordinating Board (BKPM) Chairman Chatib Basri told a press briefing in Jakarta on Tuesday.
He explained that the strong DDI growth was attributed to the fact that Indonesian domestic businesses were known as 'backward linkage investors' rather than 'pioneer investors', meaning they entered a specific type of industry only when there were foreign investors already making money there.
'In the automotive sector, for example, a foreign investor investing here causes a spillover effect to mid-sized domestic industries that can become their supply chain, such as our automotive parts and components businesses,' said Chatib, who is also the finance minister.
Aside from household consumption, investments ' which account for 25 percent of Indonesia's gross domestic product ' was touted to become the main driver for economic growth, targeted at 6.3 percent this year.
Indonesia set an ambitious target of realizing Rp 390.3 trillion in investments this year, a target that could still be achieved looking at investments realization at present, Chatib said.
In the first six months of this year, Indonesia realized investments worth Rp 192.8 trillion, or 49.4 percent of its annual target. If achieved, the realized investment would be 24.6 percent higher than the Rp 313.2 trillion recorded last year.
In the first quarter this year, investments contributed for the creation of additional 626,376 jobs, BKPM data show.
Nevertheless, Indonesia must brace for slower investment growth in the second semester, which could hinder its economic growth, the BKPM chief warned.
'Bank Indonesia's [BI] interest rate hikes will affect our investments, particularly domestic direct investments,' he said. 'The plan to unwind quantitative easing will also lead to tighter global liquidity and limit capital flow coming to emerging market economies ' not only in portfolio investments, but also real investments.'
Thanks to its stable six-plus percent economic growth, Indonesia has become the darling of foreign investors over the last few years, realizing record high FDI of Rp 221 trillion last year.
But the archipelago has seen its shine fade among foreign investors, observers have said, citing political noises stemming from the 2014 election that prompted regulatory uncertainties, as well as structural economic problems such as a high trade deficit, weak rupiah and surging inflation.
In May, international ratings agency Standard and Poor's downgraded its sovereign credit outlook for Indonesia to 'stable' from 'positive'.
Other countries in the region have also become more attractive among foreign investors, notably the Philippines.
There is still room for Indonesia to improve its investment climate with regards to investment policies or tax incentives, according to Su Sian Lim, the chief ASEAN economist with HSBC Bank.
'Competition in the region can be stiff,' he said. 'And to that end, policy needs to be focused on ensuring that these factors [investment policies or tax incentives] continue to draw investors in.'
Meanwhile, Tim Condon, the head of Asian research with the Dutch-based ING Group, shared upbeat views on Indonesia's economic prospects, citing the country's large domestic market of 240 million citizens and sound macroeconomic policy.
'Unlike in some other countries, Indonesia's monetary policy is not inimical to growth,' Condon said on Tuesday. 'There is plenty of money in the world looking for attractive returns and as long as BI maintains low and stable inflation, there are many attractive investment opportunities in Indonesia.'
