RI heading to investment boom: Bank

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