Declining Foreign Direct Investment Hampers Indonesia’s Exports

CEIC Indonesia Data Talk - April 23, 2014 - The global economic turmoil continues to adversely affect Indonesia’s economy, especially in light of the recent tapering of the bond purchase programme by the US. In addition, the political uncertainties that arise from the coming parliamentary and presidential elections are stirring up the economic and security conditions in Indonesia. As indicated by the Business Tendency Index, business prospects are improving, but it hasn’t been able to drive up investor sentiment. Partly because of the tapering programme and the election uncertainty, foreign investors’ confidence in Indonesia has waned, leading to lower net inflows of foreign direct investment (FDI). According to the Central Bureau of Statistics, total inbound FDI weakened to USD 4.08 billion in the fourth quarter of 2013, a decline of 27.27% year-on-year (YoY) and 29.28% quarter-on-quarter. Out of this total, countries in Asia contributed the most (99.6%), led by Singapore which poured in USD 2.8 billion throughout the fourth quarter of 2013. Despite the dominance of Asian countries, inward FDI from Japan was drastically reduced to USD 533.94 million, which was 77.95% lower on a YoY basis compared to the USD 2.42 billion that arrived in the fourth quarter of 2012. Likewise, the United Kingdom, the biggest investor among the European countries, contributed USD 274.18 million during the same period, which was a decline from the USD 276.00 million invested in the fourth quarter of 2012. Nevertheless, there are some countries that increased their investment over the same period, such as China which allocated USD 161.49 million, up from USD 121.00 million, and Australia which invested USD 138.83 million compared to USD 81 million. The declining investment performance overall is expected to hamper export activities in Indonesia. FDI is crucial to enhance export activities, by providing more domestic capital for local companies that can be allocated for export expansion and opening up new international markets. Separate statistics concerning Indonesia’s total annual exports show a fall of 3.94% YoY to USD 182.55 billion in 2013, compared to USD 190.03 billion in the previous year. Despite weakening overall, some industries have continued to see resilient FDI inflows as of the fourth quarter of 2013. The manufacturing sector, which receives the lion’s share of these FDI inflows (70.38% in Q4), saw FDI inflows increasing by 6.63% YoY to USD 2.87 billion. The agricultural, hunting and forestry sector also stands out with FDI inflows of USD 654.77 million during the same period, compared to USD 176 million in the fourth quarter of 2012. The inflow of FDI is one of the ways to revive the national economy as it provides more growth opportunities. Besides providing opportunities for transferring new technology and knowledge, leading to skilful and competitive local workers, the foreign capital inflow can also support local companies financially in developing and expanding their production and trade activities. FDI may further decline partly due to the tendency to hold off investments given the risks inherent in an unexpected political climate with elections taking place. Nevertheless, the government’s recent decision to reduce FDI caps on several sectors would provide some incentives for foreign investors to invest and improve the current investment climate. By Yudha Prawira Google+ Author Profile - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
23rd April 2014 Declining Foreign Direct Investment Hampers Indonesia’s Exports

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