Indonesia’s Investment Challenge; Attracting long-term capital can ease the pain from a Fed taper

Indonesia’s Investment Challenge

Attracting long-term capital can ease the pain from a Fed taper.

Updated Dec. 2, 2013 4:06 p.m. ET

An end to America’s quantitative easing is more remote now that Janet Yellen has been tapped to succeed Ben Bernanke at the Federal Reserve. So it’s a pleasant surprise to discover that some Asian policy makers remain chastened by the capital flight they suffered this summer when investors feared tapering was imminent. Case in point: Bank of Indonesia Deputy Governor Perry Warjiyo.In a speech last week, Mr. Warjiyo warned that Jakarta needs to work harder to attract foreign investment as the tidal wave of easing recedes. “The period of easy money is over,” the Jakarta Post quoted him as saying. “This means that we need to have a better capacity to attract more long-term funds, such as [foreign direct investment], to finance the shortfall [in Indonesia’s current account].”

Indonesia was one of the hardest-hit economies as capital fled Southeast Asia starting in May when it looked like a taper might be on the way. With the prospect of higher rates of return in the U.S., investors were less keen to park their money in riskier economies.

Although outflows have moderated, the economy still has seen $1.4 billion depart from its financial markets so far this year, compared to a $1.7 billion inflow in 2012. The rupiah this week hit a four-year low against the dollar. The same day Mr. Warjiyo spoke, the government failed to sell $450 million in bonds in its latest dollar-denominated issue. The rate of growth of foreign-direct investment has declined in recent quarters, and the trade deficit is roughly 4% of GDP. That’s a concern if the economy can’t attract enough long-term investment to fund its imports.

Hence Mr. Warjiyo’s warning that Jakarta needs to bolster efforts to attract more durable investment. That shouldn’t be hard for a country of nearly 250 million consumers that has enjoyed rapid growth in recent years and a growing middle class. Yet investors have been shying away from Indonesia, not least because readily available inflows led Jakarta politicians to grow complacent about pursuing pro-growth reforms.

Corruption remains rampant and important public-works projects are stuck on the drawing board. While leaders have made progress in some areas, notably reducing fuel subsidies, they’re backsliding in others. That’s especially so in natural resources, where Jakarta has stepped up its regulatory harassment of foreign mining firms, such as requirements that they divest assets and other costly rules.

This business-unfriendly attitude translates into greater risks for investors, which they’ll be less willing to bear when Federal Reserve tapering finally happens. While no government can fully shield its economy from gyrations in the world’s reserve currency, leaders can take prudent steps to soften the blow. Redoubling reform efforts now is a good place for Jakarta and other capitals to start.