Foreign investment in Indonesia: A big opportunity (Part 1 of 2)
Su Sian Lim
The Jakarta Post
The list is impressive, growing and varied ' Korea's Samsung Electronics, Taiwan's Foxconn, a major supplier for Apple, Mitsubishi of Japan, Philippine fast-food chain Jollibee Foods and Thai green tea maker Ichitan Group. These are just some of the companies that have announced plans to invest in Indonesia or are considering setting up new production facilities here.
The attractions are clear ' lower labor costs, political stability and a large domestic market where consumer spending power is growing. It seems that they are not alone. Net foreign direct and portfolio investment into Indonesia totaled US$23.2 billion last year, according to official balance of payments (BOP) data.
As in the prior two years, about 60 percent went toward foreign direct investment (FDI) in plant, equipment and other business ventures. The remainder was in the form of portfolio investment, purchases of equity and debt securities.
These are impressive numbers. At 2.7 percent of nominal gross domestic product (GDP), the net inflows exceeded those recorded by any other Asian country, with the exception of China. In 2013, Singapore, Hong Kong, Thailand and Malaysia experienced net portfolio outflows.
Taiwan, Korea and the Philippines did too, but they also saw net FDI outflows. India recorded net inflows in both direct investment and portfolio assets, but these totaled only 1.8 percent of GDP.
This year net FDI and portfolio flows into Indonesia look like being even stronger. In the first six months of 2014, net FDI stood at 2 percent of GDP, up nearly 14 percent from the same period a year ago. Net portfolio flows have almost trebled to 4.1 percent of GDP.
Few other Asian economies are able to boast of a similar surge in flows; India, Taiwan and Thailand saw improvements but rarely of the same magnitude and definitely not on both the FDI and portfolio fronts. This suggests that the smoothness of the general election in April, and more significantly, the victory of the reform-minded Joko 'Jokowi' Widodo at the presidential election in July, have played a significant role in boosting investor sentiment.
This is just as well ' if not for the optimism, inward FDI flows may not have been as strong. The level of economic growth in Indonesia's three largest investor countries ' Singapore, Japan and the US ' tends to be highly correlated with the inward FDI that Indonesia receives (in 2013, these countries accounted for 56 percent, 31 percent and 4 percent of Indonesia's inward FDI respectively). And this year, the HSBC expects growth in these economies to moderate to an average of 2.2 percent, from 2.5 percent in 2013.
Next year, however, we expect GDP growth in the three investor economies to accelerate to a five-year average high of 2.6 percent, which bodes well for the FDI outlook. More significantly, 2015 will also be when Jokowi's reform push will begin in earnest.
Although he has not yet had the chance to unveil any comprehensive investment plan, the proposals he made while on the campaign trail, as well his track record as former mayor of Surakarta and former governor of Jakarta, give cause for optimism.
Jokowi's transition team has already indicated that the administration intends to depart from the Master Plan for the Acceleration and Expansion of the Indonesian Economy (MP3EI) Program, a plan that the Yudhoyono government introduced in 2010 to propel Indonesia to developed-country status by 2025 through the development of six economic corridors.
While Jokowi is still very much for decentralization and increased regional autonomy, his election manifesto and post-election comments indicate that he will instead prioritize infrastructure projects that are consistent with his vision of developing Indonesia into a global 'maritime axis'.
This will involve developing a maritime super-corridor linking the western and eastern parts of Indonesia, the construction of 10 new hub ports to support an integrated system of six major seaports that will be upgraded to international standards, developing a ship-building industry and encouraging local governments and enterprises to develop marine and river transportion so that it becomes the main pillar connecting the archipelago.
There are also plans to develop 100 fishery centers across the country, complete with auctioning, storage and processing facilities.
The Jokowi team has also identified other industries such as manufacturing, food and tourism as key to accelerating economic growth. Unsurprisingly, for manufacturing the government will retain the current emphasis on value-add, rather than simply the export of natural raw materials. New industrial centres in five to seven corridors outside Java will also be developed.
Meanwhile, in a bid to boost the country's 'food sovereignty', agricultural-based exports and domestic agricultural processing capabilities will be developed and damaged irrigation networks will be repaired as part of the plan to increase the number of rice fields.
As for tourism, efforts will be made to promote eco-tourism and improve tourist infrastructure in a bid to lift the number of foreign visitors to 20 million by 2019, more than double the 8.8 million recorded in 2013.
In order to boost 'energy sovereignty', Jokowi has proposed replacing the confusing Oil and Gas Law with new legislation that will 'develop national capacity and provide permanent legal certainty.' He has also suggested more flexible fiscal incentives for the oil and gas sector, based on the difficulty of exploration.
At the broader level, investors can also look forward to a gradual improvement in the business environment. Some of the key issues Jokowi wants to address are corruption, inefficient government bureaucracy and inadequate infrastructure ' three of the top five most problematic factors for doing business in Indonesia, according to the latest Global Competitiveness Index (GCI).
On corruption, while Indonesia's ranking has improved moderately in the last few years, it is still one of the lowest within ASEAN.
Hopefully, as Jokowi embarks on his reforms, this ranking will start to improve more materially.
Some of these initiatives replicate policies he implemented in Surakarta and Jakarta, such as requiring performance reports from central and local government agencies and allowing the public greater access to information.
The transparency of government tenders and other processes will also be increased by bringing them online.
Specific bills and regulations to support the eradication of corruption are also likely to be passed in order to tighten the regulatory environment.
The writer is ASEAN economist at The Hongkong and Shanghai Banking Corporation (HSBC) Limited, Singapore.
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