How to Stay Attractive for Foreign Investment

· 4 minutes read

JAKARTA, KOMPAS - Indonesia has the opportunity to attract foreign investment to the country, but there is a condition, namely removing investment barriers in order to make business more competitive.

Investment barriers related to the imposition of tariffs, labor requirements, the implementation of free trade, and other restrictions that have the potential to harm competitiveness must be immediately removed.

Without removing such barriers, Indonesia will lose its momentum to attract foreign investment in 2019. In its Indonesia Economic Quarterly report from December 2018, the World Bank highlights the need for structural reforms to accelerate the growth of exports and foreign investment.

Slow export growth and limited foreign direct investment have made Indonesia very dependent on portfolio investment. Indonesia\'s direct investment accounts for 1.7 percent of gross domestic product (GDP), which is low compared to direct investment in neighboring countries. Therefore, almost 1 percent of GDP must come from portfolio investment to ensure there will be a surplus in the capital and financial account balance.

The dependence on portfolio investment worsens the impact of global pressure on the balance of payments and financial markets. According to Bank Indonesia (BI) data, direct investment reached a total of US$9.9 billion during the first nine months of this year.

Citing a report from the Organization for Economic Cooperation and Development (OECD), the World Bank’s chief economist in Indonesia, Frederico Gil Sander, said Indonesia was among the countries with the most investment barriers. Investment barriers in the form of tariffs and non-tariffs must be immediately removed to accelerate the increase in foreign and domestic investment.

Removing investment barriers will make Indonesia more competitive globally. The World Bank recommends that Indonesia should be more open to free trade, reduce import barriers and the requirements for foreign workers with special skills to temporarily fill the lack of skilled workers in the country.

"Reducing investment barriers will increase Indonesia\'s productivity. The impact can increase employment, reduce poverty, and increase the GDP growth," said Frederico in Jakarta on Thursday.

If the obstacles are not immediately removed, he said, Indonesia could lose the opportunity to attract foreign direct investment in 2019. Openness to foreign direct investment can accelerate export growth. The World Bank estimates that the current account deficit will reach 2.5 percent of GDP in 2019. According to BI data, the current account deficit was 3.37 percent of GDP in the third quarter of 2018.

Investment Coordinating Board (BKPM) head Thomas Trikasih Lembong said, during the last 20 years, the investment growth had always shown a decline when entering an election year. Usually, investment would recover a year after the elections.

"So, in terms of cycles, I am optimistic that foreign direct investment or other investment will recover in 2019. However, we should remain vigilant, because the macro conditions next year will still be challenging," said Thomas.

Foreign investors that have confirmed plans to enter Indonesia in 2019 include electronics company Pegatron Corporation from Taiwan, which has promised to invest about $1billion (Rp 14.5 trillion). In addition to electronic companies, the government also targets investors in manufacturing and textiles who will relocate their factories from China. To attract more foreign investment, the government has provided more incentives for companies with a high investment value.

So far, the government has issued an incentive in the form a tax holiday for up to 20 years, depending on the value of the investment. "If the incentives we offer are less attractive than those provided by other countries, there will be little new investment or none at all," Thomas said.

Exchange rates

The exchange rate based on the Jakarta Interbank Spot Dollar Rate returned to the level of Rp 14,536 per US dollar on Thursday. Nevertheless, BI continues to keep its vigilance, because the dynamics of the global economy are rapidly changing.

The head of BI’s Monetary Management Department, Nanang Hendarsah, said the increase of the rupiah on the spot market was quite significant on Thursday, reaching Rp 105 per US dollar or 0.71 percent. The strengthening of the Indonesian currency was supported by the release of foreign exchange by banks originating from investors and exporters.

BI’s Deputy Governor Dody Budi Waluyo said in Surabaya, East Java, on Thursday that the central bank remained consistent with its measurable intervention policy in the domestic nondeliverable forward (DNDF) and foreign exchange markets and government securities on the secondary market.

Separately, Bank Central Asia Tbk (BCA) chief economist David Sumual said BI would have the capability to cope with a surge in demand for US dollars next year, which was expected to remain high. (KRN/ DIM/ HEN)

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