Wed, 13 Aug 2003

Domestic investment approvals plunge

The Jakarta Post, Jakarta

Investment activity in the country remains in the doldrums with the Investment Coordinating Board (BKPM) revealing a bleak picture of investment during the first seven months of this year.

The board actually reported an increase in foreign investment approvals over the same period from US$3.2 billion in 2002 to $4.67 billion this year. However, only $2.1 billion of this year's figure could be categorized as foreign direct investment (FDI).

Foreign direct investment usually translates into new projects in the real sector that absorb unemployed people. For the first seven months of this year, BKPM approved 519 new projects worth $1.5 billion and expansion projects worth $616 million.

Meanwhile, the other $2.5 billion in foreign investment approvals would not translate into new projects as they came from approved changes of ownership in projects or companies involving foreign investors.

The board also reported that foreign investors were mostly interested in trading and repair work with 229 approved projects, followed by the machine and electronics sector (59 projects) and hotel and restaurant sector (34 projects).

On the domestic investment side, however, BKPM reported a 23 percent fall in domestic investment approvals to Rp 11.7 trillion (US$1.35 billion) in the first seven months of this year from Rp 15.3 trillion posted in the same period last year.

The approved domestic investment will reportedly go to 114 projects, including 97 new projects and 45 expansion projects. The figure also includes approvals for changes of ownership in 17 projects

Domestic investment will mostly be for chemical-related industries (14), machinery and electronics (12), transportation and communication (11).

The board did not offer any reason for the decline in the figures, which should further expose the country's continued weak business activity.

Analysts have long blamed the ongoing crisis, with a series of terror attacks, as the main factors keeping foreign investors at bay.

In addition, the slow pace of restructuring in both the banking and corporate sectors have also been cited as key obstacles hampering investment.

That slow pace of reform has not only caused low capital demands for new projects from the private sector but also kept the sector at a high-risk rating, making banks reluctant to channel commercial loans to them.

That condition adds to the overall unfavorable investment climate in the country, with investors complaining about various conditions here that are detrimental to investment.

They include legal uncertainty as a result of decentralization, security fears, labor-related disputes and lack of confidence in the courts.

As part of attempts to lure more investors, the government has declared this year as Indonesia's Investment Year, but so far this declaration has failed to lure new investors.

Investment approvals have been consistently declining since 1997. In 2002, FDI approvals plummeted by 35 percent, while domestic investment approvals dropped by 57 percent.

Before the crisis, investment was one of the country's main engines of economic growth.

But now, it only accounts for less than 15 percent of economic growth in terms of gross domestic product (GDP) with household consumption contributing more than 70 percent.