Tuesday, January 28, 2014

Foreign Investment Returns to Indonesia

Indonesia surprised skeptics with an oversubscribed government bond auction last week. The other bit of good news to come out of the country last week was the foreign direct investment (FDI) data, which showed investment rising to US$7.4 billion in the December quarter.
Total FDI for 2013 reached US$28.6 billion, a record-high and up 16.5% from 2012. While domestic investment moderated slightly in the second half of 2013, the sustained strength in FDI is definitely encouraging. It will be interesting if we also get a strong net FDI number in the balance of payments for the December quarter.
We have been saying for a while that strong FDI numbers are important. Persistent strength in FDI is not only a counter to the current account deficit but also a plus for long-term GDP growth prospects. The government seems confident to see another 15% growth in FDI in 2014. The manufacturing sector seems to have garnered improved interest in recent years. In particular, the auto industry continued to draw new investments, most of them from Japanese names.
The 15% growth target may seem ambitious. After all, 2014 is an election year and there are lingering uncertainties about the rupiah. Yet, those who are in Indonesia for the long term understand that there is still plenty of potential in the economy. We expect total FDI for the year to remain relatively strong in the US$25 billion to US$30 billion range.