Aranca Views | Rising FDI in Indonesia - A Report

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Rising FDI in Indonesia
September 12, 2014
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Indonesia attracted foreign investments worth USD100bn in 2009–13
The Southeast Asia region is witnessing a phenomenal increase in foreign direct investment (FDI). Last year, FDI inflows into Southeast Asia outstripped that into China by about USD1.5bn. In 2013, the Southeast Asia region received FDI worth USD125.5bn vis-à-vis China (USD123.9bn).
FDI in the Southeast Asia region has witnessed strong growth
Source: UNCTAD
Although a large proportion of FDI inflows into Southeast Asia (about 50% of the total) continue to go to Singapore, the inflows into Indonesia and Thailand have increased considerably, especially in the last five years. During 2009–13, Indonesia received FDI of around USD100bn, the largest among Southeast Asian countries. FDI inflows into Indonesia rose at a CAGR of 28% from about USD11bn in 2009 to USD29bn in 2013.
13
14
13
17
20
29
33
36
21
31
23
22
17
30
40
43
64
87
50
47
99
100
118
125
0
20
40
60
80
100
120
140
1990
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
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09
10
11
12
2013
(all values in USDbn)
Impact of Asian financial crisis
Impact of global economic crisis

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Why is Indonesia seen as a prominent investment destination?
The introduction of Investment Law No. 25 in 2007 was the cornerstone of the stupendous rise in FDI inflows in Indonesia. The law aimed at providing increased assurance on issues such as equal treatment among investors, repatriation of profit, investment incentives, and protection from nationalization in a bid to boost the investment climate in the country.
Indonesia came on the radar of foreign investors after Fitch and Moody’s raised the country’s sovereign credit rating to investment grade. In December 2011, Fitch raised Indonesia’s sovereign rating to BBB-, with a stable outlook, from BB+, taking the country to investment grade status about 14 years after it lost the status. In January 2012, Moody’s Investors Service upgraded Indonesia to investment grade, with a sovereign rating of Baa3 from Ba1, for the first time since the 1997 Asian financial crisis.
Indonesia benefited mainly because it remained unaffected by the 2008–09 global economic crises. Aided by strong internal macroeconomic drivers, Indonesia's economy weathered the global recession and grew 4.6% in 2009. Furthermore, statistics show the Indonesian economy expanded 5.9% in the last five years.
Indonesia registered strong GDP growth in 2009
Indonesia’s GDP growth over 2004–13
Source: The International Monetary Fund
Indonesia’s steady growth was driven primarily by robust consumer spending and foreign investment. With a massive 250 million population base (the fourth largest in the world) and a growing middle class, more than 50% of Indonesia’s GDP is generated from domestic consumption. Even foreign investors are attracted by the country’s large consumer base and vast reserves of diversified natural resources such as natural gas, coal, copper, nickel, bauxite, and tin.
4.6%
1.8%
1.1%
-0.4%
-0.6%
-1.5%
-2.3%
-4%
-2%
0%
2%
4%
6%
5.0%
5.7%
5.5%
6.3%
6.0%
4.6%
6.2%
6.5%
6.3%
5.8%
0%
2%
4%
6%
8%
2004
05
06
07
08
09
10
11
12
2013
(Y-o-Y change)
(Y-o-Y change)

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Which sectors are attracting foreign investment?
A careful analysis of the sector-wise breakup of FDI inflows in Indonesia reveals that mining & quarrying; transport equipment; metals, machinery & electronics; chemicals and pharmaceuticals; electricity, gas & water supply; and transport, storage & communication attracted the largest FDI in the last five years (65% of the total FDI). Mining & quarrying: Indonesia has vast reserves of natural gas, coal, copper, nickel, bauxite, and tin which find applications in many industries such as construction, automobile, and telecom. In the last two years, mining attracted the largest FDI, at around 17% of the total. Transport equipment: Indonesia has received large FDI from Japanese auto giants. Japanese manufacturers view Indonesia not just as a demand centre (due to the growing middle class) but also as an important source of production due to rising costs back home. In 2013, Indonesia's car sales increased 10% Y-o-Y to 1.23 million car units. Metals, machinery & electronics: Machinery and electronics is another sector that has received large FDI in recent times. As Indonesia’s economy develops, efforts are being made to ensure the country becomes self-sufficient in the production of electronics and capital goods. Chemical & pharmaceutical: Chemicals and pharmaceutical sector attracted substantial FDI. A major reason for investment is the government’s push to turn Indonesia’s oil and natural gas output into higher value products. Chemical makers are also being focused on to ensure production of feedstock (currently largely imported) for Indonesia’s pharmaceutical companies.
Mining has been the most attractive sector for foreign investors
Source: Indonesia Investment Coordinating Board (BKPM)
Other two sectors – electricity, gas & water supply, as well as transport, storage & communication – attracted FDI after the government promoted collaborations through Public Private Partnership (PPP) projects and enhanced foreign ownership levels significantly.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2009
2010
2011
2012
2013
Mining & quarrying
Transport equipment
Metal, machinery & electronics
Chemical & pharmaceutical
Electricity, gas & water supply
Transport, storage & communication
Other

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Which countries have been investing in Indonesia?
In 2013, Japan, Singapore, the US, South Korea, and the UK were Indonesia's biggest foreign investors. During the last five years, Japan and Singapore jointly contributed nearly one-third of the total FDI in Indonesia. Last year, Japan surpassed Singapore to become the largest FDI provider in Indonesia. Considering that manufacturing contributes around 25% to the Japanese economy, Japan has been looking to expand its manufacturing base over the last few years, to strengthen its economic position. Japan, Indonesia’s largest trading partner, has strong relations with the country and views Indonesia as its future manufacturing hub. Japanese investors also view Indonesia’s emerging economy as having the potential for rapid growth in the near future. Data shows that Japanese car makers including Toyota, Daihatsu, Mitsubishi, Suzuki, Honda, Nissan, and Isuzu, have more than 90% share in Indonesia’s car market. Singapore has made huge investment in Indonesia, more than USD20bn, in the last five years. Several foreign countries route their FDI in Southeast Asia through Singapore as the country offers them preferential access to key sectors. Infrastructure (particularly hard infrastructure, such as roads, rail networks, seaports, and airports) and industrial manufacturing are two key areas where Singapore has been investing. Notably, Indonesia and Singapore have been among each other’s top five trading partners for many years. The US has raised its investment in Indonesia. Last year, the US provided FDI worth USD2.4bn to the country, double the amount invested in 2011. In the past, US investments in Indonesia were mainly focused on oil and gas, and mining. However, this has changed with recent investments directed more toward automotive, food products, and financial sectors. South Korea has invested heavily in Indonesia in recent times. South Korea enjoys good access to Indonesian markets due to a 2006 free-trade agreement with ASEAN member countries. Over the last few years, South Korea invested in electronics, mining, and power sectors in Indonesia. South Korea is an important trading partner for Indonesia; over the past few years, trade between the two nations expanded from forestry and garment sectors to mega projects and advanced industries. Cultural similarities between the two countries are an important reason for the increased investment in Indonesia. In the last two years, the UK significantly raised its investment in Indonesia, particularly in oil & gas, finance, and banking and insurance sectors. In 2012 and 2013, the UK invested USD2.0bn in Indonesia compared with USD1.0bn over 2009–11.
Japan and Singapore are the major foreign investors
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2009
2010
2011
2012
2013
Japan
Singapore
United States
South Korea
United Kingdom
Netherlands
Other

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Others countries including the Netherlands, Malaysia, Mauritius, Taiwan, and British Virgin Islands are some of the large investors in Indonesia.
What does the future hold?
In the first half of this year, Indonesia received foreign investments worth USD14bn. FDI inflows in 2Q 2014 stood at USD7.4bn, the highest quarterly figure ever for the country. Yet, it is questionable whether the current stream of foreign inflows would continue in the future.
Several reasons underlie this theory. First, Indonesia’s mining sector has been weighed down by a string of regulatory changes. Earlier this year, Indonesia banned mineral ore exports, which came as a surprise to the mining world. Earlier this year, Indonesia surprised the mining world by banning mineral ore exports. While the government took steps to relax restrictions on exports of copper and other ores, the ban on nickel and bauxite remains. This shift in export policy is likely to have global ramifications and may deter FDI inflows. Second, Indonesia suffers from rampant corruption and foot-dragging bureaucracy. According to a Gallup poll, 88% of Indonesians said corruption was widespread in the country's government, while 82% said it was widespread within its businesses. Since the figures were among the highest in the seven Southeast Asian countries where the survey was conducted, this may lead to foreign investors shifting focus to countries which are less corrupt. Moreover, Indonesia is tagged as a difficult place to do business, as confirmed by the country’s ranking of 120th out of 189 countries in a recent World Bank’s Doing Business report. It takes about 48 days and 10 procedures to start up a new business in Indonesia compared with an average of 38 days and seven procedures in the East Asia & Pacific region. In addition, Indonesia’s vulnerability to exchange rate volatility and widening current account deficit are other concerns supporting the speculation that the current stream of foreign inflows into the country may not persist, going forward.
FDI inflows in Indonesia are on the rise
Despite all the reasoning, Indonesia may remain a favorable destination for foreign investors due to its large population base and rising consumer demand. In the past, FDI inflows in Southeast Asia focused on securing raw materials (mining) and finding inexpensive production centers. Today, the FDI inflows are chasing market opportunities emerging from the country’s strong demographic profile and demand for better infrastructure, better living, and better products, most of which are quite visible. The swearing-in of Joko Widodo as the president in October is also expected to result in a series of favorable economic reforms, generating lucrative opportunities for foreign investors. Considering the scenario, it is advisable to wait and review the policies of the new government, and then seek answer to the question whether FDI inflows would continue unabated into Indonesia.
3.9
3.9
4.5
4.1
4.4
4.8
5.2
5.1
5.7
6.2
6.3
6.3
7.0
7.2
7.0
7.4
6.9
7.4
0
1
2
3
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6
7
8
Q1
Q2
Q3
Q4
Q1
Q2
Q3
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Q1
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(all values in USDbn)

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This report is published by Aranca, Inc. Aranca is a customized research and analytics services provider to global clients.
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Aranca Views | Rising FDI in Indonesia - A Report

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Aranca Views | Rising FDI in Indonesia - A Report