Already in the last quarter of 2016 we detected a decline in foreign direct investment (FDI) growth. Considering domestic and external factors remained pretty much the same in the first quarter of 2017, declining FDI growth continued.

Externally, markets and investors are cautious due to the uncertain (economic and fiscal) policies of US President Donald Trump. Trump is eager to cut corporate taxes significantly and that would make the United States a more attractive investment destination for industrial players. In fact, if the USA indeed agrees to cut corporate taxes heavily there could occur a global "tax war". For example, Singapore and Thailand may also cut taxes hence becoming a more competitive environment compared to Indonesia.

Domestically, Indonesia - and especially the capital city of Jakarta - has been plagued by a high degree of ethnic and religious tensions since incumbent Jakarta Governor Ahok became involved in a blasphemy scandal. This led to several massive demonstrations in Jakarta, organized by hardline Muslims who reject Ahok as leader of a Muslim-majority city. In February 2017 Ahok won the first round of the Jakarta gubernatorial election. However, this only caused more tension. He was defeated in the second round that was organized in April 2017.

The defeat of Ahok does mean that ethnic and religious tensions in Indonesia have eased and therefore it creates a better business environment starting from midway Q2-2017.

In sharp contrast to FDI is the realization of domestic direct investment (DDI) in Indonesia in the first quarter of 2017. DDI rose 36.5 percent (y/y) to IDR 68.8 trillion, faster than the 25.8 percent (y/y) growth pace in the preceding quarter.

Most FDI (some USD $2 billion divided over 1,314 projects) originated from Singapore. However, it is widely known that many Chinese companies invest in Indonesia using their Singapore unit. Singapore is followed by Japan with USD $1.4 billion worth of investment in Indonesia in Q1-2017. Next comes China (USD $599.6 million) and the United States (USD $587.4 million).

Indonesia's mining industry was the most popular industry in terms of foreign direct investment realization in Q1-2017. About USD $1.2 billion was invested by foreigners in Indonesia's mining industry divided over 232 projects. Meanwhile, most of DDI went to transportation, warehousing and telecommunications industries (IDR 16 trillion in 114 projects over the same period).

Foreign Direct Investment (FDI) & Domestic Direct Investment (DDI) in Indonesia (in IDR trillion):

                            2015                             2016
  Q1   Q2   Q3   Q4   Q1   Q2   Q3   Q4   Q1   Q2   Q3   Q4
DDI  34.6  38.2  41.6  41.7  42.5  42.9  47.8  46.2  50.4  52.2  55.6  58.1
FDI  72.0  78.0  78.3  78.7  82.1  92.2  92.5  99.2  96.1  99.4  99.7 101.3
116.2 119.9 120.4 124.6 135.1 140.3 145.4 146.5 151.6 155.3 159.4


                     2012                      2013
 Q1  Q2  Q3  Q4  Q1  Q2  Q3  Q4  Q1  Q2   Q3   Q4
DDI 14.1 18.9 19.0 24.0 19.7 20.8 25.2 27.5 27.5 33.1  33.5  34.1
FDI 39.5 43.1 46.5 46.2 51.5 56.1 56.6 65.5 65.5 66.7  67.0  71.2
53.6  62.0 65.5 70.2 71.2 76.9 81.8 83.3 93.0 99.8 100.5 105.3

Source: Indonesia Investment Coordinating Board (BKPM)