Mon, 20 Jul 2015

As Southeast Asian nations count down to the formation of an integrated economic community later this year, foreign direct investment (FDI) inflows remain high in anticipation of more business opportunities.

FDI inflows to Southeast Asia increased by 5% to US$133 billion in 2014, according to the World Investment Report 2015 released recently by the UN Conference on Trade and Development (Unctad). That compared with a 9% increase in 2013 to $126 billion.

"As a result of cost advantages, efficiency-seeking FDI in manufacturing to low-income countries in Asean increased, sometimes driven by large projects, such as an announced investment of $600 million by the Taekwang and Huchems Group (from South Korea) in Myanmar," the report said.

In Indonesia, where many investors stayed on the sidelines last year while they awaited the outcome of the presidential election, still recorded the strongest growth in FDI in the 10-country bloc with a 20% rise to $23 billion from $19 billion in 2013.

Southeast Asia's largest economy ranks fourth among developing and transition economies worldwide and the growth, according to the report, was "driven by a significant increase in equity investment".

But to maintain high and sustainable growth, Indonesia should rely more on exports of manufactured goods rather than primary resources, said Shinta Widjaja Kamdani, the head of international relations with the Indonesian Employers Association (Apindo).

"At present, Indonesia does not have a specific policy to attract [export-oriented FDI]. The government's strategy is to attract any kind of foreign investment," she said.

Vietnam, which many companies see as an important location for low-cost production, recorded a rise of 3% in FDI to $9.2 billion last year.

Shinta said Vietnam was a possible rival for Indonesia because it had more investor-friendly laws.

The Jakarta government, she said, continues to say that it wants to attract foreign investment but in fact it is deterring many businesses with complicated and often contradictory investment rules and rhetoric heavy on economic nationalism.

"We are neither here nor there," she said. "If the government wants a closed [investment approach], make it closed."

Unless there is a significant breakthrough in FDI policies, Indonesia's 2015 target of 518 trillion rupiah ($39 billion) in investment would not become a reality, she added. "The government needs to understand that we are not the only country seeking investments."

The Unctad report ranked China at the top of the FDI list at $129 billion, surpassing the United States.

Djisman S Simanjuntak, a senior economist at the Centre for Strategic and International Studies (CSIS), said the Indonesian government could benefit from China's dominance in foreign direct investment outflows.

"But what we already have here is small compared to China's FDI in other countries. After all, China is the largest [economy] in Asia," Djisman said, adding that while investments from other countries were always welcome, growth from Europe probably would be limited as most major European investors were already present in the country.

While it focuses on attracting fresh investment, Djisman said the government should also be encouraging incumbent businesses to expand.

"Reinvestment accounts for the largest part of investment. Last year it was about 33% of GDP. That's what we have to pursue," he said. "The most important thing to make investors feel welcome."

Like most of its peers, Indonesia has been seeing slower economic growth in line with general global weakness, especially in trade. GDP in the first half of this year expanded by 4.9%, down from 5.3% in the first half of last year.

The sluggish economic performance has increased pressure on President Joko Widodo to reshuffle his cabinet, especially ministers with economic responsibilities.

"A cabinet reshuffle is inevitable to improve the government's performance," said Karyono Wibowo, a researcher from political think tank Indonesian Public Institute (IPI). "There's a growing public dissatisfaction with the cabinet and its concurrent with public's declining trust in the president and the vice president."

He said a review of the cabinet's performance was necessary after eight months, in light of apparent signs of economic instability and continued depreciation of the rupiah against the US dollar.

The rupiah has weakened to around 13,350 per dollar with few signs of an upturn given the greenback's strength in global markets at the moment. The government has already assumed an exchange rate between 13,000 to 13,400 rupiah in its proposed 2016 budget.

Mr Karyono warned that if the rupiah continued to slide and reached 15,000 to the dollar, it could trigger an economic meltdown similar to the 1998 financial crisis.

"It is true that there are global factors contributing to the sluggish economic conditions, but they are not the only factors. There's a distrust of the government and that has triggered the continued rupiah depreciation," he said.