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Mining Law boosts foreign investment
Foreign direct investment (FDI) growth in Indonesia has reached a historic high in the second quarter after slowing earlier this year, partly boosted by new investments in the mining sector
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oreign direct investment (FDI) growth in Indonesia has reached a historic high in the second quarter after slowing earlier this year, partly boosted by new investments in the mining sector.
Stronger growth is expected in the future with the enforcement of the Mining Law, which requires miners to process their mineral ore locally before exporting.
The Jan. 12 ore export ban triggered at least 50 planned smelter projects worth US$31.4 billion in total to be realized in the next few years, according to the Investment Coordinating Board (BKPM).
The board reported on Thursday that FDI realization in the second quarter grew by 16.9 percent year-on-year to top Rp 78 trillion ($6.7 billion), taking total realized investments in the April-June period to Rp 116.2 trillion, the highest in history.
In the first quarter of this year, Indonesia registered a mere 9.8 percent FDI growth, as investors adopted a wait-and-see approach due to the country's political uncertainty.
'Investors may have realized that our economic fundamentals remain intact, despite the legislative and presidential elections of this year,' BKPM chairman Mahendra Siregar said.
Among attractive industries for foreign investors were transportation, warehouses and telecommunications, which collectively generated $1.4 billion in the second quarter, or 19.3 percent of total FDI realization.
Trailing were the food industry, with $1.3 billion in realized FDI, and the mining industry, with $1.1 billion.
In the mining industry, Mahendra emphasized that Indonesia had benefited from the implementation of the law, with the ore export ban ' the law's auxiliary regulation ' able to push miners to add value to their products.
The investment value for the establishment of 50 new smelters is sufficient to finance around seven years of Indonesia's trade deficit, which amounted to around $4 billion last year. International stakeholders, like the US-based World Bank, have argued that the policy is doing the economy more harm than good.
'If we look at the numbers, we can conclude that investments in smelters have now become more attractive,' said Mahendra.
Indonesia's stable and robust economy, combined with its growing middle class, has made it a darling among foreign investors. Peaceful legislative and presidential elections this year also showed the political stability demanded by businesses in one of the world's largest democracies.
Economists have predicted even stronger FDI inflows into Indonesia in the future as president-elect Joko 'Jokowi' Widodo has cemented his reputation as an investor-friendly leader pushing for reforms.
'In the nearer term, a Jokowi victory should restart the flow of FDI, which has been on hold because of the election uncertainty,' noted Bank of America Merrill Lynch economist Chua Hak Bin.
However, Indonesia's robust investment growth was overshadowed by low job creation as many investors moved to capital-intensive industries to sidestep rising labor costs. In the second quarter of 2014, 350,803 jobs were created, around half the number of 626,376 jobs generated a year before, according to BKPM data.
Asian Development Bank (ADB) economist Edimon Ginting said low job creation was also caused by Indonesia's recent economic slowdown, which had dragged down domestic demand and had forced some businesses to operate at 'overcapacity' by 'enlarging their investments without absorbing new labor'.
