Direct & Portfolio Investment in Indonesia Expected to Rise in 2017
Investment in Indonesia is expected to rise in 2017. This covers both direct investment and portfolio investment. Domestic direct investment (DDI) should grow on the back of Indonesia's low interest rate environment (making it cheaper for domestic investors to purchase credit) as well as higher capital injections (from the state budget) into Indonesia's state-owned enterprises. Meanwhile, foreign direct investment (FDI) is expected to rise on the back of Indonesia's accelerating economic growth and government reforms. Both FDI and DDI should also rise amid rising commodity prices.
Apart from rising capital injections into state-owned enterprises (SOE), the central government has also raised its budget for infrastructure development across the archipelago in 2017, aiming to trigger the so-called multiplier effect. In October 2016, the government announced that it allocated IDR 387.3 trillion (approx. USD $29.8 billion) for infrastructure development in the 2017 State Budget, up from IDR 317.1 trillion in the preceding year.
Meanwhile, portfolio investment in Indonesia is expected to rise in 2017 on the back of the overall solid macroeconomic fundamentals of Indonesia (accelerating economic growth, under-control inflation, a stable rupiah exchange rate, and the under-control current account deficit), rising corporate earnings of Indonesia's listed companies, higher yields, and negative interest rates in several big markets (European Union and Japan).
The above expectations were expressed by Indonesian Finance Minister Sri Mulyani Indrawati and former Indonesian finance minister Chatib Basri during the "Indonesia Eximbank Investor Gathering 2017" in Jakarta on Tuesday (07/02).
Both also expect Indonesia's export performance to improve this year as commodity prices have somewhat improved in recent months, particularly coal and crude palm oil (CPO). Indonesia is among the world's top exporters of coal and CPO. Rising commodity prices will also strengthen people's purchasing power, particularly outside the island of Java. This development should boost direct investment, especially now it has become more affordable to purchase credit in Indonesia.
According to the latest data from BKPM, investment realization in Indonesia reached IDR 612.8 trillion in full-year 2016, up 12.4 percent from realization in the preceding year and 3 percent above the target that was set by the BKPM. DDI rose 20.5 percent (y/y), while FDI climbed 8.4 percent (y/y) in 2016.
However, there remain risks of capital outflows from Indonesia, especially in case the US Federal Reserve will raise its interest rate environment further. Basri said the Fed may raise its benchmark Fed Funds Rate three times in 2017 by a combined total of 75 basis points. Moreover, US President Donald Trump wants to cut US taxes. This would increase the budget deficit and cause rising US Treasury bond yields. Therefore, the Fed faces another reason to raise its interest rate regime. Meanwhile, to avert capital outflows from Indonesia, this could mean that Indonesia's central bank (Bank Indonesia) also needs to raise its benchmark interest, perhaps by 25 basis points to 5.00 percent.
Other external risks include the uncertain (and controversial) political and economic policies of Trump, while the re-balancing of China's economy can also impact on the Indonesian economy considering China is one of Indonesia's biggest trading partners.
Still, Basri is convinced that Indonesia remains an attractive market for portfolio investment, especially considering the negative rates in several nations that are eagerly trying to boost economic growth and inflation. Indonesia, with strong GDP growth and a decent benchmark interest rate, is therefore an attractive alternative. Last year Indonesia's benchmark Jakarta Composite Index rose by 15.3 percent. Basri expects a similar growth figure in 2017.
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