Japanese investment in Indonesia has declined drastically in 2014 due to concern about the stability of Indonesian politics. Investment realization tumbled to USD $2.7 billion in 2014 from USD $4.7 billion in the previous year. The investment climate of Indonesia in 2014 was plagued by concern about the ‘political year’, referring to the legislative and presidential elections that were organized and the uncertainty they brought about as it was a tight race between market favorite Joko Widodo and controversial candidate Prabowo Subianto.

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The economy of Indonesia expanded 5.02 percent year-on-year (y/y) to IDR 8,354 trillion (USD $664 billion) in 2014, the nation’s slowest annual growth pace since 2009, according to the latest data from Statistics Indonesia (BPS). As such, GDP growth failed to achieve the central government’s 5.5 percentage point growth target that was set in the 2014 State Budget. Indonesia’s economic growth has been slowing since 2011 when it still posted a 6.5 percentage point growth rate (y/y). However, growth is expected to rebound from here.

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Indonesian Trade Minister Rachmat Gobel said that the continuation of economic cooperation between Indonesia and Japan, as set out in the Indonesia-Japan Economic Partnership Agreement (IJEPA), is to be reviewed soon by both countries. Gobel met Japan’s Prime Minister Shinzo Abe and Japan’s Minister of Economy, Trade and Industry Yoichi Miyazawa in Tokyo today. In the IJEPA it was mentioned that cooperation between both countries can be reviewed after the bilateral free-trade agreement had been in effect for five years.

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On Monday (08/12) the World Bank released the December edition of its Indonesia Economic Quarterly, entitled ‘Delivering Chance’. In the report the World Bank cut its forecast for economic growth in Indonesia next year to 5.2 percent (y/y), from 5.6 percent (y/y) in the July edition of its flagship publication, due to weaker investment growth and sluggish exports. Indonesia’s GDP growth in 2014 is projected at 5.1 percent (y/y), slightly below the World Bank’s previous estimate of 5.2 percent.

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Government investment service agency Indonesia Investment Coordinating Board (BKPM) targets IDR 524 trillion (USD $42 billion) worth of investments in 2015, a 15 percent growth from estimated investment realization this year (IDR 450 trillion). BKPM is optimistic that after the ‘political year’ of 2014 (due to the legislative and presidential elections) the new government will push for the implementation of various infrastructure projects such as toll roads, harbours and airports, thus making Indonesia more attractive to foreign investors.

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As the number of foreign tourists rise rapidly and there is increasing demand for conferences, exhibitions and business meetings, Indonesia will see a massive inflow of investments for the construction of hotels and condominium hotels (condominium hotels combine features of apartments and hotels). In 2015, the value of new (condo) hotels projects is estimated at IDR 38.5 trillion (USD $3.2 billion), up 57.3 percent from last year. Locations that attract tourists and locations close to education centers are the primary choice.

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Global rating agency Fitch Ratings affirmed Indonesia’s Sovereign Credit Rating at BBB-/stable outlook (investment grade status) on Thursday (13/11). This rating affirmation by the credit rating agency can be regarded as international recognition of prudent fiscal policy in Southeast Asia’s largest economy amid global uncertain times. Policy responses pursued by both the government and central bank of Indonesia have been well received by Fitch Ratings and managed to safeguard economic stability.

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On 19 October 2014, Indonesia Investments released the latest edition of its newsletter. This free newsletter, which is sent to our subscribers once per week, contains the most important news stories from Indonesia that have been reported on our website in the last seven days. Most of the topics involve economic topics such as the performance of Indonesian stocks and the rupiah, foreign direct investments, an update on the coal mining sector, tax, the cement industry, palm oil, steel industry, and more.

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Newly elected presidential pair Joko “Jokowi” Widodo and running mate Jusuf Kalla, the pair that will guide Indonesia for the next five years starting from October 2014, propose to raise the target for economic growth in Southeast Asia’s largest economy from 5.6 percent to 5.8 percent in 2015. Furthermore, the pair would like to set a stronger average rupiah rate at IDR 11,600 per US dollar over 2015 (from IDR 11,900 as set in the Revised 2015 State Budget). Several reasons are behind these ambitious targets.

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According to the Indonesia Investment Coordinating Board (BKPM), Singapore is the largest foreign investor in Indonesia. In the first half of 2014, Indonesia received USD $3.4 billion worth of investments from Singapore. In total, foreign companies invested IDR 150 trillion (USD $12.9 billion) in Indonesia during the first six months of 2014. This is the highest amount of foreign investment that Indonesia has ever managed to attract in a six-month period. It also diluted fears that the legislative and presidential elections would cause a temporary slowdown.

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A Foreign Representative Office (Kantor Perwakilan Perusahaan Asing [KPPA]) is a more general form of representative office than the foreign trade representative office and the foreign construction services representative office as we covered in previous columns. The Foreign Representative Office is regulated by BKPM, whereas the aforementioned representative offices are regulated by respectively the ministry of trade and the ministry of public works. Due to the general nature of a Foreign Representative Office, it is typically set up to provide managerial support to the parent company abroad.

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A foreign construction service representative office in Indonesia is established by foreign overseas parent companies, specifically for conducting business activities in the field of construction services. Construction services can be defined as consultancy services in planning of construction work, construction implementation services, and consultancy services regarding the supervision of construction work.

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A foreign trade representative office in Indonesia can be set up by overseas companies quickly and with relative ease. In general, a foreign trade representative office is established with the purpose to take care of the interests of the parent company abroad and/or for preparation of the establishment and development of foreign investment activities in Indonesia. Due to their purpose the scope of activities is limited to representation of the overseas company and is therefore not allowed to directly be engaged in sales and related activities.

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A total of twenty Japanese companies engaged in the food and beverage industry are exploring investment opportunities in Indonesia. According to research conducted by the Japan International Cooperation Agency (JICA), the food and beverage industry of Indonesia is regarded as a lucrative investment opportunity by these companies. If realized, these foreign direct investments could be worth between USD $400 million to USD $1 billion. However, JICA’s research did not mention any names of the Japanese companies.

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The Indonesia Investment Coordinating Board (BKPM) announced on Thursday (24/04) that investment realization of both domestic and foreign direct investment have set a new record in the first quarter of 2014. Total investment realization in Q1-2014 stood at IDR 106.6 trillion (USD $9.4 billion), an increase of 14.6 percent compared to the same period in 2013 (IDR 93 trillion) and the third consecutive time that the quarterly figure exceeded the IDR 100 trillion mark. Foreign direct investment accounted for 52 percent of total investments.

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Mahendra Siregar, Head of the Indonesia Investment Coordinating Board (BKPM) is optimistic that realized investment in Indonesia can reach over IDR 100 trillion (USD $8.6 billion) in the first quarter of 2014, particularly supported by foreign direct investment (FDI) in the country's automotive and electronics sectors. Siregar uttered his optimistic view at the groundbreaking of the new Toyota factory in Karawang (West Java) on Tuesday (25/02). Foreign investors remain buoyant on the potential of Indonesia's rapidly expanding consumer force.

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At Bank Indonesia's Board of Governors’ Meeting today (13/02), it was decided to maintain the country's benchmark interest rate (BI rate) at 7.50 percent as well as the interest rates on the Lending Facility and Deposit Facility at 7.50 percent and 5.75 percent respectively. The policy is consistent with the tight monetary policy stance currently adopted in order to steer inflation back towards its target corridor of 4.5±1 percent in 2014 and 4±1 percent in 2015, as well as to reduce the current account deficit to a more sustainable level.

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On Tuesday (21/01), the Indonesia Investment Coordinating Board (BKPM) announced that investments in Indonesia grew 27 percent to IDR 398.6 trillion (USD $33 billion) in 2013, thus exceeding the target that was set at the start of the year (IDR 390 trillion). This result, which is a new record high for Southeast Asia's largest economy, was supported by a 39 percent increase in domestic direct investment (IDR 128.2 trillion) and a 22 percent increase in foreign direct investment (IDR 272.6 trillion).

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Indonesia's Finance Minister Chatib Basri stated that the government of Indonesia is busy preparing three new policies that aim to restore financial stability as well as attract foreign direct investments. These three new policies involve the higher sales tax on imported luxury cars, a revision of Indonesia's negative investment list, and the higher income tax on imported consumption goods. These three new policies are in addition to the policy package that was introduced by the Indonesian government in August 2013.

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According to a survey of the Japan Bank for International Cooperation (JBIC), 44.9 percent of respondents assessed Indonesia as the most promising investment destination for the next three years. The respondents in this survey involved 500 Japanese companies that engage in international businesses. For Indonesia it is the first time in 21 years that it forms the preferred choice of overseas investments for Japanese companies, thus replacing China. In 2013, Japan already dominates foreign direct investment in Indonesia.

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