RI heading to investment boom: Bank

Rendi A. Witular, The Jakarta Post/Jakarta

Indonesia is likely to experience a domestic investment boom starting next year given the considerable savings rate at home and a possible depreciation of the U.S. dollar against the rupiah, global investment bank Morgan Stanley said.

With stronger domestic investment, which will lead to an increase in export activities, Southeast Asia's largest economy will no longer rely on private consumption to sustain its economic growth.

Morgan Stanley's economist Daniel Lian said that among the larger four of Southeast Asia, Indonesia and Thailand were more likely than Malaysia and the Philippines to experience an investment boom starting next year.

"A domestic investment boom is more likely with a considerable savings rate and if Southeast Asia tries to correct the unproductive investment of yesterday by investing to boost productivity," said Lian in a statement on Wednesday.

Lian said Indonesia's gross savings ratio from 1994 until 2003, which reached 27.6 percent of gross domestic product (GDP), indicated room for the lift in gross investment ratio by 10 percent of GDP to 29.4 percent of GDP in the next few years.

According to Bank Indonesia, as of July this year, third party funds at local banks reached Rp 909 trillion (about US$ 101 billion), minus Rp 530 trillion, which has been channeled in the form of loans. The remaining Rp 379 trillion remains untapped to help spur economic growth.

Lian warned that the high savings rate in Indonesia should be managed carefully and wisely, in order to avoid the damaging mistake the country made before the Asian financial crisis in 1997.

During the last phase of the investment boom from the late 1980s to mid 1990s, Southeast Asia, including Indonesia, splurged largely on unproductive investment such as high-end condominiums and golf courses rather than on productive assets.

The new phase of investment will require Indonesia to boost the productivity of its tourism, agriculture, and small-and- medium enterprises sectors as well as sufficient infrastructure to support the activities, Lian said.

"A negative structural development will occur if the domestic investment demand boom is not managed properly. A tough journey of restoring export competitiveness through productive investment should be taken," he said.

While domestic investment will be picking up, private consumption will be declining due to "young demography, institutionalized or forced saving social structure, the high price of property relative to income, unequal distribution of income and wealth and undervalued exchange rates".

Domestic investment in Indonesia will also be spurred by a possible dollar depreciation if the United States' Federal Reserves finally decides to drive down the value of the dollar and China finally submits to outside pressure to revalue its currency, a condition that will strengthen regional currencies.

"A positive structural development could take place as the region exploits its currency gains to help fund its own investment boom since foreign capital goods for capital formation will become cheaper," said Lian.

The currency gains will also favor domestic demand in general as imports become cheaper and would help sharpen Indonesia's focus to improve its tourism, agriculture, and small-and-medium enterprises sectors because its conventional manufacturing exports will become less competitive and less in demand in the global market.

BOX

Southeast Asia savings and investment (in percentage of GDP)

Gross savings 1994-2003 average 1994 2003

Indonesia 27.6 32.2 24.2 Malaysia 43.8 39.6 42.3 Philippines 16.3 14.9 19.5 Singapore 47.9 47.9 44.9 Thailand 34.0 36.3 33.2

Gross investment 1994-2003 average 1994 2003

Indonesia 21.3 31.1 19.4 Malaysia 30.0 41.2 21.4 Philippines 20.2 24.1 16.6 Singapore 29.3 33.1 13.4 Thailand 28.8 40.3 25.2

Source: CEIC, Morgan Stanley