Foreign direct investment in RI expected to increase

JAKARTA (JP): Foreign direct investment in Indonesia may reach US$4.8 billion next year, up 20 percent from this year, if the government applies sound conflict-management measures when dealing with political issues, an economist has predicted.

Rizal Ramli, a director of the Econit economic advisory group, said yesterday the increase will be pushed by the strengthening of the yen against the U.S. dollar which is likely to follow the currency's recent drop to a record low of 115 yen to a dollar.

"A high economic growth of around 7.5 percent next year and a better purchasing power, especially of the middle class, will also encourage foreign investors to come," he said at a presentation on Econit's economic outlook for 1997.

"But there is a possibility that political uncertainty next year will make the investors choose to wait and see," he said.

Policies on fiscal incentives alone may not be sufficiently comprehensive to encourage companies to increase investment next year, particularly if government decision-making processes continue in a fragmented fashion, Rizal said.

Domestic investment, on the other hand, will be determined by the rate of economic growth, changes in domestic demand and interest rates.

"Domestic investment will be encouraged by intra-trade and multi-sourcing trends and interdependency between ASEAN member- countries," he said.

He forecast a shift in the market sector preferences of domestic investors, who he predicted will opt for resource- intensive industries.

Domestic investment in the manufacturing sector, which was previously dominated by the textile and non-metal sub-sectors, will move towards the chemical, pulp and paper and food industries.

"An increase in investment in the chemical and paper industries shows a shift towards resource-intensive sectors, in which Indonesia has a strong competitive edge," he said.

Increasing investment in the food sub-sector results from a change in urban consumption patterns and eating habits.

Rizal also anticipated the utilities sector -- comprising of power, gas, and water -- and the construction and manufacturing sectors, will be the three main sectors to contribute to Indonesia's economic growth next year.

Except for the manufacturing sector, which is partly export- oriented, growth in these key sectors indicates an increase in domestic demand, which in turn creates a domestically demand- driven economy.

A large proportion of domestic demand is for non-tradable goods. This may cause a structural increase in the current account deficit.

Rizal predicted the utilities sector will grow by 12.5 percent next year; the manufacturing sector by 10.8 percent; the construction sector by 11 percent; the agricultural sector by 1.4 percent; the retail and services sector by 8.6 percent; and the transportation and communications sector by 8.2 percent. (rid/pwn)