Rising foreign investment driving RI's economy

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."