FDI in Indonesia has fallen for the first time in two years as southeast Asia’s biggest economy faces growing challenges from a widening current account deficit to rising economic nationalism ahead of next year’s elections

October 23, 2013 11:49 am

Foreign direct investment falters in Indonesia

By Ben Bland in Jakarta

Foreign direct investment in Indonesia has fallen in US dollar terms for the first time in two years as southeast Asia’s biggest economy faces growing challenges from a widening current account deficit to rising economic nationalism ahead of next year’s elections. The government’s investment co-ordinating body (BKPM) said on Wednesday that realised FDI fell from $7.2bn in the second quarter to $7bn in the third quarter, the first quarter-on-quarter decline since 2011. That still represented a rise of more than 18 per cent compared with the third quarter of last year.The value of FDI increased marginally in rupiah terms but that was because of the decline in the value of the rupiah, which tumbled by more than 15 per cent against the dollar between May and September as investors pulled out of riskier emerging markets like Indonesia.

Once a darling of emerging market investors, the hype surrounding Indonesia’s prospects has cooled markedly in the last year as the falling price of key export commodities such as coal and palm oil has revealed structural imbalances in the economy and a ballooning current account deficit.

“The confidence that Indonesia would always be growing at 6-7 per cent per year [in gross domestic product terms] has been undermined,” said Robert Prior-Wandesforde, an economist at Credit Suisse in Singapore. “I don’t think the long-term growth prospects have been deteriorating. I just think they weren’t as good as a lot of people thought they were.”

Mahendra Siregar, who recently took over as chairman of the BKPM, said that the government was planning to mitigate the slowing trend in the growth of FDI by kick-starting stalled economic reforms and cutting red tape.

“We have to understand the global and national economic growth adjustment,” he said. “We are committed to improve procedures for investment . . . and we are going to continue with structural reform.”

The World Bank recently downgraded its GDP growth forecasts for Indonesia, which expanded at an average of 6 per cent per year in the previous five years, to 5.6 per cent this year and 5.2 perc ent next year. Chatib Basri, the finance minister, is more sanguine, predicting growth of 5.9 perc ent this year and 5.8-6.1 per cent next year asIndonesia turns crisis into opportunity.

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Mr Siregar said that despite the slower pace of growth, this country of 250m people remained an “important” country for many investors, who are attracted by the large and expanding middle class and the plentiful natural resources.

“On the one hand, Indonesia continues to keep attracting new investment,” he said. “But those who have been established in Indonesia for many years still have confidence in the growth potential and they are investing more [as well].”

But Mr Prior-Wandesforde warned that, while FDI was running at far higher rates than just five years ago, the growth trend was likely to continue slowing, with implications for Indonesia’s GDP and company profits.

He said that if companies revise their ten-year GDP projections for Indonesia down from 6-7 per cent to 5-6 per cent “that makes a big difference to the numbers of cars, motorbikes and washing machines bought”.