Investment to grow by 15 percent: World Bank
Leony Aurora, The Jakarta Post/Jakarta
The World Bank expects investment in Indonesia to grow by 15 percent this year, but warns that further measures to improve the investment climate must be taken to maintain the momentum.
The bank's economist William Wallace said that at the moment there was an excess demand from customers, forcing producers to look for new investment to boost their production capacity to meet and cash in on the rising demand.
"Once the demand is met, it (investment) will settle back down if the investment climate doesn't improve," he said on the sidelines of a seminar held by the Hong Kong and Shanghai Banking Corporation (HSBC) on Friday.
To maintain investment and lure bigger investors -- in mining, oil and gas, infrastructure and the like -- in 2006 and beyond, the government needs to improve the system this year.
Indonesia is in dire need of infrastructure to support the flow of investment into the country. The government has estimated that it would need a whopping US$150 billion in new investment for infrastructure projects over the next five-year period, of which 55 percent is expected to come from foreign investors or loans from donor countries.
The HSBC views that investment in Indonesia has now reached to a point where it would likely be more sustainable.
From the demand side, capacity utilization is rising and factories have started to produce goods again. Profit expectations from companies are also rising following the increasing demand from the people.
HSBC head of sales and global marketing Radianto Kusumo warns, however, that the country should not rely too much on investment as the main drive behind Gross Domestic Product (GDP) growth.
"In 2004, investment contributed approximately 2.2 percentage points to the total GDP growth of 5.9 percent," he said. The rest was contributed by consumption from the government and consumers, both domestic and foreign.
"This is an ideal balance," he added. If investment contributed more than 50 percent of the GDP growth, people would wonder whether the demand would catch up with the excessive investment.
In Indonesia's pre-crisis economy -- which saw massive investment from foreign and domestic players -- investment contributed between 4 and 5 percentage points of the between 7 percent and 8 percent growth, or more than 50 percent.
The World Bank forecast, in its latest report, that Indonesia's economy would grow by 6 percent on average between 2006 and 2009.
Other macroeconomic indicators are also encouraging, as seen in the declining trend in the state budget deficit from 1.8 percent in 2003 to 1.2 percent in 2004, and an estimated 1 percent this year.
Wallace said that Asian countries, including Malaysia, Taiwan, and China, had shown apparent interest in Indonesia. "They're more comfortable with the operating environment here," he said.
"If they continue to make profit, the Europeans, Americans, and the Japanese will follow with bigger projects," he added.