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Indonesia is undoubtedly in the midst of an economic slowdown, faced with growth substantially below the government’s target and presently contending with a slew of issues pertaining to rising inflation, a weakening rupiah and slower than expected progress in carrying out much-vaunted infrastructure development. Concerns over the country’s immediate future have in recent months been focused on a dip in consumer spending – seen by many as the backbone of Indonesia’s economy – exacerbated by a jump in unemployment disproportionately affecting young jobseekers.
Particular attention is being paid to this trend given its persistence during the month of Ramadan, a period of time typically characterised by a substantial uptick in consumer spending. The Indonesian Retail Merchants Association estimated that retail spending during Ramadan would decrease by 36% year on year. Consumer durable industries experienced a similar decline with automotive sales among the hardest hit (25.7% decrease y-o-y). These developments are in keeping with a lower consumer confidence index of 111.3 points in June 2015 compared to 116.3 points in June 2014, as reported by Bank Indonesia.
These current economic difficulties, however, have not been reflected in foreign direct investment in Indonesia. Foreign investors remain positive about the country’s long-term prospects, as evidenced by still surging foreign direct investment levels that reached new heights in 2014 and have gone from strength to strength in the first half of 2015. Despite frequent coverage of the nation’s ongoing economic challenges, international investors are increasingly putting their money on the Indonesian growth story, encouraged by the bigger picture; Indonesian consumers remain among the world’s most confident (Nielsen), despite a recent decline in this measure, and the market continues to present untapped business opportunities aplenty. Such investor sentiment has been supported by institutions such as The Asian Development Bank, which recently expressed its optimism regarding the country’s medium-term outlook in spite of the bevy of short-term issues that need to be addressed.
According to reports released on 27th July 2015 by the Investment Coordinating Board (BKPM), Indonesia in Q2 2015 recorded 92.2 trillion IDR (equivalent to $6.8 billion USD) of foreign capital funds flowing into various sectors within the economy; excluding oil and gas, banking, non-banking financial institutions, insurance, leasing and SMEs. The quarter’s results represent an 18% y-o-y increase in foreign direct investment, and follows on from similarly positive results in Q1 2015, which saw the country bring in 82.1 trillion IDR in FDI – a 14% rise from the same period last year.
Foreign Direct Investment in Indonesia 2010 – 2015 (in trillion IDR)
Source: BKPM
Within the context of the last half-decade, this FDI pattern is hardly an anomaly; foreign direct investment into Indonesia has risen steadily over recent years in line with the country’s emergence as a major player on the international stage (See Indonesia in 2015: Economic and Political Renewal Shifts Investment Focus). The fact that this upward trend has been largely unencumbered by political transition and a generally negative perception about the economy’s current position, however, is demonstrative of a level of resilience among foreign investors in Indonesia that few would have expected.
The impact of a tumultuous second half of 2014 attributed to political uncertainty typical of an election year was seemingly localised, with international investment mostly unaffected. FDI inflow, in fact, increased by a slight margin in Q4 2014, contributing to an overall rise of 21% between 2013 and 2014 (UNCTAD World Investment Report). In spite of the country’s continued grapple with the aforementioned challenges of rising inflation and a local currency now at a 17-year low against the dollar, Indonesia is well on its way towards surpassing its 2015 total realised investment target of 519 trillion IDR according to BKPM Chairman, Mr Franky Sibarani.
Observing Indonesia’s FDI pattern by sector in Q1 2015, investments in the manufacturing sector accounted for 43.7% of all inbound FDI, followed by various service sectors at 29.2% and mining at 17.3%. Other than that, food crop and plantations was the only other major area of interest for foreign investors at 9.1%. The preliminary FDI report for Q2 2015, on the other hand, shows transportation, storage and telecommunications bringing in a total of 32.3% of foreign investment while construction saw a three-fold leap compared to the previous quarter, from 3% to 8.8%. This is in keeping with the new administration’s focus on infrastructure development (See Concrete Developments in Indonesia’s Infrastructure) as well as ongoing initiatives to improve upon telecom connectivity (See Indonesian Telecommunications – An Increasingly Mobile Market).
Foreign Direct Investment by Sector in Q2 2015
Source: BKPM and The Jakarta Globe
The latest foreign direct investment figures emphatically support the idea that Indonesia remains a viable and promising market for overseas interests, particularly for those willing to weather short-term challenges in pursuit of long-term gain. Irrespective of the perception that the government has thus far struggled to live up to expectations, the elements that have made Indonesia a favourite FDI destination in the past remain firmly entrenched today (See Why Indonesia). Moreover, President Joko Widodo’s administration still has a vital role to play in realising its extensive infrastructure development plans. The disbursement of government funds – thus far the missing piece in Indonesia’s attempts to spur growth – to facilitate the actualisation of new projects should have a knock-on effect in creating new openings for foreign direct investment across the archipelago.
During a recent four-day trade mission to Southeast Asia, Prime Minister David Cameron made clear Britain’s interest in investing in Indonesia’s infrastructure (Jakarta Globe, 28th July 2015), and this sentiment is shared by numerous other leading global economies such as China and Japan that are currently involved in high-profile transportation projects in the country (See Indonesia’s Public Transport Projects on the Move). With foreign investors ready and willing to enter this field, the onus is on the government to improve upon its performance between January and late April 2015, which saw spending of only 2% of its 290 trillion IDR budget allocated towards infrastructure development (Reuters, 6th May 2015).
It is hoped that the disbursement of government funds will move into a higher gear in Q3 2015, but much is still contingent upon steps being taken to address the longstanding issues of bureaucracy and red-tape that have delayed projects in the past. Progress in this regard is vital not only to further attract foreign direct investment, but also to promote the growth of regional businesses dependent upon government spending and the initiation of public works projects. Success in meeting this year’s expenditure targets may also go a long way towards stimulating growth through a multiplier effect with the potential to revive job creation and reverse flagging consumer spending.
Global Business Guide Indonesia - 30th July 2015
Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)
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