Rising foreign investment driving RI's economy

The Jakarta Post, Asia News Network, Jakarta

Despite the natural disasters that have devastated parts of the country, Indonesia's economy is expected to remain on track to recovery this year, largely because of rising foreign investments, improved exports and strong domestic demand.

Indonesia, Southeast Asia's largest economy, is expected to grow by between 5 percent and 6 percent this year, with the government posting an official projection of 5.5 percent growth.

Economists expect the tsunami in Nanggroe Aceh Darussalam and the massive earthquake that devastated the Nias island in North Sumatra to slow Indonesia's economic growth by a meager 0.2 percent at the most.

They warn that a failure by the government to anticipate soaring global oil prices and a volatile rupiah could result in a high inflation rate that could hurt the economy. The government has another huge task -- to improve Indonesia's investment climate and invigorate the real sector to ensure growth and reduce the country's poverty and unemployment rates.

Nevertheless, the numbers are encouraging. Data from the Central Statistics Agency shows that the country's gross domestic product (GDP) grew by 5.13 percent last year, on the back of strong domestic consumption, improved investment and increased exports.

This was higher than the earlier estimate of 4.8 percent growth. Indonesia's GDP reached Rp 2.3 quadrillion last year, higher than pre-Asian financial crisis levels.

Despite the fact that consumption accounted for the majority of the country's GDP -- 66.54 percent, as compared to 20.99 percent from investments -- it was in fact investments that drove last year's economic growth.

Investments grew 15.71 percent and accounted for 5.9 percent of last year's economic growth, while domestic consumption only grew 4.94 percent and accounted for 3.1 percent of total growth.

Standard Chartered Bank country economist Fauzi Ichsan said he expects this trend to continue, with new investments this year supporting the domestic consumption sector.

Standard Chartered estimates that Indonesia's economy will grow by 5.3 percent this year.

"There are indications that new investments are being committed to sectors such as the retail and automotive industries," he said, adding that last year's imports largely constituted investments in manufacturing equipment.

In its latest report on Indonesia's economy, global investment bank Morgan Stanley said Indonesia had the potential to attract more foreign direct investment, considering that many existing investments in the country were in need of restructuring because of their already high capacity rates.

New investments are expected to boost production and Indonesia's export capability.

Meanwhile, Bank Mandiri chief economist Martin Panggabean said investments could pave the way for this year's economic growth, with new investments most likely in the infrastructure sector, particularly the construction of roads and highways.

"The Infrastructure Summit that the government recently organized was a catalyst for investor interest in investing in Indonesia's infrastructure sector," he said. Bank Mandiri estimates Indonesia's economy to grow by 5.7 percent this year.

Despite the upbeat views, there is still a danger of inflation because of high global oil prices, which could force the government to raise fuel prices -- again. That danger is even more imminent as Indonesia is now a net oil importer.

Higher inflation would in turn lead to higher interest rates, hurting businesses and eventually the whole economy, economists have warned.

Inflation has indeed begun to rear its ugly head, with the Central Statistics Agency reporting the on-year inflation rate for the first quarter of this year at 8.81 percent because of the government's decision to raise domestic fuel prices last month.

Bank Indonesia has, however, said it will continue its tight monetary policy throughout the year -- including adjusting interest rates to maintain the inflation rate at between 5 percent and 7 percent.

A weak rupiah could also prove to be a problem for the country. Indonesia is still at risk of currency problems, as its exports are offset by high imports and debt payment obligations.

Data from the central bank shows the average exchange rate stood at Rp 9,279 per dollar during the first quarter, off from the government's assumption of Rp 8,900.

Another issue that could derail Indonesia's growth is weak governance, which could thwart the country's efforts to improve the investment climate.

"The main problem that the government should promptly address is corruption," Martin from Bank Mandiri said. "The legal uncertainties plaguing the country can be traced back to corruption."