The normalization of the US monetary policy has led to an outflow of portfolio investments from most emerging markets, including Indonesia. On the other hand, the US-China trade war has a positive impact in the increased inflow of foreign direct investment to the Asian region.
By
ENNY SRI HARTATI
·4 minutes read
There is no doubt that the normalization of the US monetary policy has led to an outflow of portfolio investments from most emerging markets, including Indonesia. On the other hand, the US-China trade war has a positive impact in the increased inflow of foreign direct investment (FDI) to the Asian region. This is because US protectionism pressures Chinese production, and Chinese China will affect US productivity.
The US and China have the largest market share of world trade. For example, the US is one of the world’s largest consumers of auto parts. Therefore, some automotive investors are increasing their investment in Thailand so it will be able to meet the demand of the US market. Investments also rose in Vietnam and Malaysia for electronic products, such as cell phones and laptops. Vietnam\'s economy grew more than 6.6 percent year-on-year (yoy).
Meanwhile, third-quarter investment realization in Indonesia was Rp 173.8 trillion, down 1.6 percent yoy. In fact, foreign investment was a mere Rp 89.1 trillion, down 20 percent yoy. Indeed, aggregate investments in January-September reached Rp 535.4 trillion, up 4.3 percent yoy. Unfortunately, only domestic investment (PMDN) increased, from Rp 194.7 trillion to Rp 241.7 trillion, while FDI declined from Rp 318.5 trillion to Rp 293.7 trillion.
Total FDI entering Indonesia in the third quarter was US$6.01 billion, far higher than the $750 million in the Philippines, $2.32 billion in Vietnam, $2.79 billion in Thailand and $680 million in Malaysia. However, although the FDI inflow to Indonesia is the largest in the region, its contribution to gross domestic product (GDP) is relatively small. FDI contributed about 25 percent to Indonesia’s GDP, lower than the 40.6 percent in Malaysia, 44.7 percent in Thailand and 50.5 percent in Vietnam.
This is because Indonesia has a current account deficit of $8.8 billion, or 3.37 percent of GDP. Of this amount, 90 percent ($8.03 billion) comes from primary income, partly due to the repatriation of foreign funds for dividend payments.
On the other hand, FDI that has entered other ASEAN countries has contributed to an increase in exports. Malaysia, Thailand and Vietnam are building industrial estates that facilitate FDI entry to the manufacturing industry. The realization of FDI in Indonesia in January-September has shifted to the tertiary sector. FDI in the tertiary sector increased 17 percent to Rp 138.8 trillion, while it declined 24 percent (Rp 106.4 trillion) in the secondary sector and fell 20 percent to Rp 48.6 trillion in the primary sector.
FDI is not interested in entering Indonesia’s manufacturing sector because of regulatory uncertainties and high-cost economic pressures. This can be seen from the World Bank’s 2019 Ease of Doing Business Index, in which Indonesia fell from 72nd to 73rd and has been overtaken by Vietnam, currently ranked 69th.
In addition, Indonesia is ranked 46th in the Logistics Performance Index (LPI). Although this is an improvement from its previous position in 63rd, the country is still unable to compete with Thailand (32), Vietnam (39) and Malaysia (41). One of the reasons is the problem of the long dwell time of import cargo at ports.
Main obstacles
From the data above, it can easily be concluded that the key obstacles to foreign investment inflows to Indonesia concern the absence of regulatory certainties and economic inefficiencies.
Approved investments in the January-December 2017 investment activity report (LKPM) reached Rp 1.838 quadrillion, of which Rp 906.3 trillion was in FDI. However, only Rp 692.8 trillion, or 37.7 percent, of all investments were realized. This means that eliminating the various obstacles to investment realization is the greatest need. Thus, the 16th economic package that includes an expanded tax holiday facility, a more relaxed Negative Investment List (DNI) and an obligation to deposit foreign exchange earnings from exports (DHE) in local banks do not address the various constraints to investment.
Allowing 100 percent foreign ownership will not guarantee the attractiveness of investments if the basic infrastructure is inadequate and uncompetitive. Opening more sectors to foreign investment through a relaxed DNI may still attract investors, but only in the service sector, which does not require the support of complex infrastructure. In the short term, the service sector has high potential for attracting FDI that could help reduce the current account deficit. Added value and low labor absorption have the potential to pressure the current account deficit for a long time.
In the 1990s, the Indonesian economy grew more than 7 percent because of contributions from the manufacturing industry, which grew by two digits. Investment incentives should actually focus on accelerating the manufacturing industry. Incentives for the downstream palm oil industry could be realized in designated Special Economic Zones.
Tax holidays should be given to all export producers, especially those that do not use imported raw materials.
Enny Sri Hartati, Executive Director, Institute for Development of Economics and Finance (Indef)