Investment to pick up: Experts

Urip Hudiono, The Jakarta Post, Jakarta

With a new administration in office and current investments in the country in need of replenishment, Indonesia is on a promising path toward an investment boom this year, analysts say.

But for this to happen, the government has to provide more than just political stability. Analysts say President Susilo Bambang Yudhoyono and his administration must address several persistent problems -- including the country's labor sector -- that threaten to derail the investment boom.

"Positivity is awakening in Indonesia," Morgan Stanley economist Daniel Lian said in the global investment bank's latest economic report on Indonesia, which was issued in Singapore.

"Under the right conditions, Indonesia's potential for an investment pickup is sound."

Apart from the government's strategically wise move of offering investors 91 projects worth some US$22.5 billion at the recent Infrastructure Summit, Lian said Indonesia would likely experience a rise in investment because earlier investments were in need of upgrading in their productivity.

The capacity utilization rate of existing investments has already reached a high of nearly 70 percent, at a time when they are getting old from a lack of investment over the past seven years since the economic crisis.

"A recent study shows that 30 percent of locomotives in the transport sector have been operating for more than 30 years," Lian said.

Many investments in the manufacturing sector have also been import-reliant, meaning that their technology transfer to local workers has been limited.

"This implies that Indonesia has a lot of catching up to do in terms of technology and skill, which we believe signals substantial potential for investment," he said, adding that investment -- in terms of public savings and real investments -- could reach 30 percent of Indonesia's gross domestic product this year.

Standard Chartered economist Fauzi Ichsan said that with the high level of market competition, companies needed more flexible labor regulations to be able to maintain the efficiency of their operations.

"Foreign companies investing here need to be able to restructure their operations quickly in face of a possible economic downturn, which may include layoffs," he said, adding that there was nothing wrong with providing worker rights and raising the minimum wage, but that it should result in an increase in productivity.

The government, Fauzi added, must promptly address the labor issue, in addition to the "classical" problems of red tape and legal uncertainty that are hurting the country's investment climate.

"The government should quickly resolve the Karaha Bodas, Semen Gresik and Cepu oil field legal disputes, to show investors that the government is serious about providing legal certainty for them," he said.

Nevertheless, Fauzi sees real investment in the country growing by some 17 percent this year, accounting for some 25 percent of GDP.

"This will help the economy to grow by some 5.5 percent this year," he said. "However, a 30 percent contribution is still needed to reach 6 percent GDP growth and absorb the unemployed."

The Investment Coordinating Board recently reported that approved foreign direct investment (FDI) in the first quarter rose 173 percent from a year earlier to US$4.28 billion.