Tue, 28 Jun 2016

The UK’s exit from the European Union (Brexit) on Thursday last week has rattled the global financial market. As stocks plummeted, sterling fell to its lowest since 1985, at 1.33 per US dollar.

However, Investment Coordinating Board (BKPM) Chief Franky Sibarani is optimistic that Brexit will not have a negative impact on UK investment in Indonesia because direct investments are generally long-term investments. Therefore, the UK’s decision to leave the EU would not affect existing business deals.

Franky even saw this as an opportunity for the UK to increase its investment in Indonesia. “We don't need to worry about the UK leaving the EU because it will not affect existing business agreements,” Franky said in an official release on Saturday (25/6).

He believes that Indonesia is now in a good position to attract investment. Indonesia has trade agreements with its main trading partners and is negotiating free trade deals with the EU and US. Also, British companies could use Indonesia as a production base for entry into the global market.

BKPM Deputy for Implementation Control Azhar Lubis said the BKPM will intensify its relationship with potential investors as the government moves to reform the nation's investment policies. “The BKPM representative in London continues to communicate with British investors on investment services, deregulations to create an investment friendly climate, infrastructure development, and improving the quality of human resources,” said Azhar.

The UK is one of Indonesia's main investment partners. Between 2010 and 2015, UK investment in Indonesia amounted to US$4.8 billion and the UK was ranked Indonesia’s eighth biggest investor.

UK investment commitment in 2010-2015 amounted to US$3.1 billion. In January-May this year, its investment commitment amounted to US$111 million, up 517 percent on the same period last year.

Bank Indonesia released an official statement after the UK voted to leave the EU. The central bank said Indonesia’s economy has been resilient. Low inflation, controlled current account deficit, and a stable exchange rate are evidence of its continued macroeconomic stability.

This will help the Indonesian economy weather the effects of the UK referendum. Bank Indonesia said the UK’s exit from the EU would have a little impact on the nation’s domestic economy, including on the money market, and on trade and investment activities.

While Brexit continues to wreak havoc on the European and Asian money markets, on the domestic money market, the value of the rupiah is relatively stable.The Indonesian stock market has also been left relatively unscathed, “Unlike the stock markets in India, Thailand and South Korea,” said Tirta Segara from BI’s Communications Department.

The medium-term impact of this Brexit on trade will be limited too because trade with the UK makes up only around 1 percent of Indonesia’s export market. However, it will be important to keep an eye on the UK’s future trade relationship with Europe.

Indonesia’s exports to Europe, excluding the UK, accounted for 11.4 percent of total exports last year. Raw materials make up the majority of exports from Indonesia to Europe. “Bank Indonesia will continue to keep an eye on any potential risks,” said Tirta.