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Slower FDI growth in Q1 a short-term shock: Analysts

Coffee break: A drink seller serves a customer in Jakarta on Friday

Satria Sambijantoro (The Jakarta Post)
Jakarta
Sat, April 26, 2014

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Slower FDI growth in Q1 a short-term shock: Analysts Coffee break: A drink seller serves a customer in Jakarta on Friday. Indonesia booked Rp 106.6 trillion (US$9.2 billion) in realized investment in the first quarter of this year, a 14.6 percent increase from Rp 93 trillion last year. However, the realized investment only provided 260,156 jobs, down from 361,924 jobs last year. (JP/Ricky Yudhistira) (US$9.2 billion) in realized investment in the first quarter of this year, a 14.6 percent increase from Rp 93 trillion last year. However, the realized investment only provided 260,156 jobs, down from 361,924 jobs last year. (JP/Ricky Yudhistira)

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span class="inline inline-none">Coffee break: A drink seller serves a customer in Jakarta on Friday. Indonesia booked Rp 106.6 trillion (US$9.2 billion) in realized investment in the first quarter of this year, a 14.6 percent increase from Rp 93 trillion last year. However, the realized investment only provided 260,156 jobs, down from 361,924 jobs last year. (JP/Ricky Yudhistira)

The slower pace of foreign direct investment (FDI) growth in the first quarter will be temporary, as investors are awaiting the economic direction of the new government after the upcoming election, analysts say.

FDI realization rose 9.8 percent year-on-year (y-o-y) to hit Rp 72 trillion (US$6.2 billion) in the first quarter of this year, far below y-o-y growth of 25 percent that the country recorded in the previous quarter.

FDI comprises 68 percent of total realized investments.

'€œWe think prospects for FDI [in Indonesia] remain positive given strong domestic demand and favorable demographics,'€ Chua Hak Bin, an ASEAN economist with Bank of America Merrill Lynch, said on Friday.

Indonesia'€™s move to ban mineral exports and oblige miners to process their ores locally would also be a significant boost to the country'€™s economy, he added.

'€œThe stricter ore export policy may create some uncertainty in the short-term, but could encourage more FDI in the longer-term.'€

Other analysts also noted that the temporary slowdown in FDI may not be a bad thing for Indonesia, which is now prioritizing economic stability over robust growth expansion.

'€œToo much FDI will weigh on the economy as it invites imports that can widen the current-account deficit while at the same time prompting higher capital outflows, because more foreign companies means higher earning repatriation overseas,'€ Eric Sugandi, an economist with Standard Chartered Bank, said in a phone interview.

Bank Indonesia (BI) Governor Agus Martowardojo said there should be no unwarranted anxiety over the country'€™s significant slowdown in FDI realization growth, which could hamper dollar supply in the market.

He said the slowdown could be well compensated by the robust growth of foreign portfolio investment (FPI), despite the fact that FDI was more stable than FPI, which is often referred to as '€œhot money'€, and that showed a long-lasting commitment to an economy.

'€œOverall, the slowdown in FDI growth is still in line with what we have predicted,'€ Agus told reporters on Friday. He also took time to ease concerns over the pressure on the balance of payments due to FDI growth, which economists said was an important component in the capital account.

Limited dollar inflows from FDI slowdown could be offset by robust inflows of portfolio investments. '€œSo far, portfolio investments have contributed quite a lot to our strong capital inflows,'€ Agus said.

FDI contributed to the dollar supply in the local Indonesian foreign exchange (forex) market.

At least 20 percent of realized FDI, which topped $32 billion last year, is in the form of fresh dollars and the rest is in the form of tangible goods and raw materials, according to central bank data.

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