Satria Sambijantoro, Jakarta – Indonesia may face another downturn in its economy as the slowdown in foreign investment would likely continue at least until the next two years as foreign companies would wait for the results of the 2014 general elections before pouring back their money.
Indonesia posted only 18.9 percent FDI growth in the second quarter, its slowest pace in three years. Economists have predicted the slowdown to continue, crippling an economy that is already hurt by surging inflation, weak exports and languid government spending.
"Growth from investments is needed because our exports outlook is bleak," Fauzi Ichsan, a senior economist with Standard Chartered, said on Wednesday. "Our consumption is also affected from the fuel price hike, which is sparking inflation and weakening people's purchasing power."
Investment is the second-biggest contributor to Indonesia's economic growth, accounting for roughly 25 percent of its gross domestic product (GDP). Household consumption has 55 percent share in GDP, with the rest comprising exports and government spending.
Despite the slowdown in FDI growth, Indonesia still managed to realize Rp 99.8 trillion (US$9.78 billion) in investments in the second quarter, 30 percent higher compared to a year earlier, thanks to the strong growth in domestic direct investments (DDI) that topped an eye-popping level of 59 percent.
The slowdown in FDI was a worrisome because it was the main driver of job creations. Of the 626,376 of additional jobs created from investment realization in the second quarter, 62 percent came from FDI, according to statistics from the Investment Coordinating Board (BKPM).
Indonesian Employers Association (Apindo) chairman Sofjan Wanandi said that the presence of foreign investors benefited local industries, as both complement each other in terms of employment creation.
"They are controlling sectors that we cannot enter due to the high technology requirements, such as electronics or automotive. Meanwhile, we can [complement foreign investors] by developing businesses that are related to supply chains or distribution," he said.
Observers have warned over possible moderation in investments as foreign investors held back due to political uncertainty, opting to wait until after the 2014 elections.
International ratings agency Moody's Investors Service stated in February that, ahead of the 2014 elections, there would be growing nationalist sentiment that could prompt policy and regulatory uncertainties, consequently affecting Indonesia's investment climate.
Indonesia targeted economic growth to top 6.3 percent this year, but recent slowdown in investments meant that the economy faced risks of only growing 5.9 percent this year, according to Destry Damayanti, the chief economist of state-run Bank Mandiri.
"Historically, FDI always slows down when we are ushering in a political year," she said in a phone interview.
"FDI investors were different from portfolio investors, because they were investing for long term. Hence, they want to have certainty on who would become the president, or which parties are in charge of the legislature," Destry explained.
Finance Minister Chatib Basri has reassured that Indonesia would be able to meet its yearly FDI realization target of Rp 272 trillion. In the first half this year, the government realized only 48.5 percent of the target, or Rp 132 trillion, of foreign investments.