Prime target: Foreign investors return to the market

Sources of long-term capital, particularly needed for large-scale projects in infrastructure, remain more elusive in Indonesia than in neighbouring economies. The contribution of pension funds and insurance companies has remained limited, yet the size of the mutual fund industry has grown significantly. Interest will likely grow further when Indonesia attains an investment-grade rating in 2012. The country has, however, returned as a prime target for foreign direct investment (FDI). The central bank is confident FDI will provide some cushion should short-term portfolio investment flows reverse, but also as a source of much-needed financing for infrastructure and productive capacity.

ATTRACTIVE: Foreign investors have returned in force since late 2009 in the face of anaemic growth in developed markets. Interest has been particularly strong in the resource sector and for businesses targeting the country’s significant domestic consumption base and commodity exports. Total investment grew 54.2% year-on-year (y-o-y) to reach Rp208.5trn ($25bn) in 2010. Both Investment Coordinating Board (BKPM) and balance-of-payment data reflect a significant growth in FDI flows. “Balance-of-payment data reveals that a significant portion of FDI consists of intra-multinational company lending across borders and retained earnings,” Anton Gunawan, the executive vice-president and chief economist of Bank Danamon Indonesia, told OBG. “The remainder, what could be called real FDI flows, are smaller than total FDI figures suggest, although these have been growing too,” he added.

The ratio of FDI to portfolio inflows has risen from roughly 1:5 in the past to 2:3 and even 1:1 (depending on the quarter) in 2011. Ratings agencies speak of a new period of sustained growth for the economy. Indeed, in December 2011, ratings agency Fitch upgraded the country’s sovereign debt rating despite a weak global economy in the second half of 2011.

Commodities have been key targets for investors – 20% of total investment is in mining – while much of the remaining 80% is made up of investment in agriculture, manufacturing and services. Traditionally strong investors still dominate Indonesia’s FDI landscape: Singaporeans, Americans, Japanese, Chinese and Koreans remain bullish on opportunities. Singapore-based investors were by far the largest originators of FDI in 2010 with 414 projects worth $5bn, although some of these funds represent Indonesian-owned corporates.

Other Asian investors, such as those from Japan, China and South Korea, have also expanded their presence.

STRONG INTEREST: Bullishness continued in the first half of 2011 and investment exceeded the already strong 2010 levels, with FDI totalling $9.6bn up from $6.2bn in the first half of 2010. The strong y-o-y growth was sustained in the third quarter, with BKPM announcing a 15.7% y-o-y rise in inward FDI, reaching $5.3bn in that quarter alone. Despite volatility in international markets, the authorities have maintained their target of $16bn in inward FDI for financial year 2011. US investors alone injected $936.1m in the first half, surpassing 2010 levels. The 71 US projects are spread over a variety of sectors including, among others, construction and mining equipment with Caterpillar’s $500m investment and IT with Microsoft and Cisco Systems.

While traditional Western investors have sustained their FDI interest, Asian investors have emerged as the most vocal proponents of the Indonesian FDI story.

South Korean investors have announced some big-ticket investments. Pohang Iron and Steel Company plans to invest $6bn in mining and steel production, while Honam Petrochemicals Corporation has unveiled a planned $4.5bn petrochemicals complex.

Investors from countries such as China, India and the Middle East have joined traditional source markets. Kuwait Petroleum Corporation wants to build an $8bn-$9bn oil refinery to feed growing domestic demand, while the UAE was expected to invest $9.5bn in aluminium smelters in October 2011. India’s Reliance ADA Group announced in early 2011 its intention to invest between $5bn and $10bn over the next three years in mining, transport infrastructure and power.