Investment Forms the Backbone of the Economic Growth
In addition, Indonesia remains a global investment magnet in Southeast Asia amid the pandemic.
By
Kompas Editor
·3 minutes read
The government hopes that investment will serve as the main engine of economic growth amid a decline in household spending as a result of the pandemic. (Kompas, 30/7/2021).
In contrast to the global trend in foreign direct investment (FDI), which has dropped sharply during the COVID-19 pandemic, the flow of FDI into Indonesia increased in the first half of the year.
On the other hand, for portfolio investment, the capital outflow from Indonesia, which began in 2020, has continued. The increase in the FDI flows into the country is believed to be the impact of the recent recovery of the national economy after experiencing a recession in 2020 and the improvement of the business climate following the issuance of implementing regulations for the enactment of the Job Creation Law, which has significantly removed investment barriers in the country.
In addition, Indonesia remains a global investment magnet in Southeast Asia amid the pandemic. Despite losing the competition with Vietnam to become the main destination for industrial relocation in the region, Indonesia remains the second-largest global investment destination in Southeast Asia, after Singapore.
Domestic investment (PMDN) also showed an upward trend, albeit the increase was not as high as FDI. According to data from the Investment Coordinating Board (BKPM), investment realization, both for PMDM and FDI, reached a total of Rp 442.8 trillion (about US$30.70 billion) in the first half of the year, a 20 percent increase from the same period in 2020. FDI accounted for 51.66 percent of the total.
Global FDI dropped by 35 percent to about US$1 trillion, the lowest since 2005. Meanwhile, in this year, global FDI is projected to further decline by between 5 and 10 percent year-on-year.
On one hand, the positive investment performance illustrates the improvement of investor confidence and the investment climate thanks to structural reforms made by the government in recent years.
However, the increase in the realization of the investment has not be accompanied by an improvement in the quality of the investment itself. Judging from its destination, investment is still concentrated in Java, which accounts
for 48.5 percent of the total. Although there are new investments (greenfields) such as the construction of electric vehicle and battery factories, which are expected to be able to leapfrog industrialization in Indonesia, the largest portion of investment, or about 80 to 90 percent, still goes to the property sector, such as housing, industrial estates and offices.
Investment outside Java is also still concentrated in extractive sectors: mining and oil and gas.
Meanwhile, investment in machinery and equipment accounts for only about 10 percent. As a result, direct investment is still unable to improve the productivity and export performance of the producers of high value-added products so that they will be able to compete in the world market and enter global supply chains. Investment outside Java is also still concentrated in extractive sectors: mining and oil and gas.
We hope the Investment Ministry will be able to make a breakthrough so that direct investment will not only be able to create job opportunities but also enable Indonesia to leapfrog its industrialization and lay the foundation for higher long-term and sustainable economic growth so that Indonesia will be able to avoid the middle-income trap and become a developed country.
(This article was translated byHendarsyah Tarmizi).