Worsening investment climate in Indonesia is not reflected in FDI figures yet

In the last few months, overseas analysts and bankers were echoing that Indonesia is losing its sparks as favorite investment destination by investors due to new tighter regulations for mainly the mining and banking industry.

However figures of the Foreign Domestic Investment (FDI) for the first half year give a contraire indication. In the second quarter, the Foreign Direct Investment inflow was a record USD 5,9 billion. This was 30,2% more YoY. About USD1 billion went into mining, chemical and pharmaceutical industries, USD 600 million for electricity, gas and water supply, USD 500 million for food and USD 500 million for metal, machinery and electronics. The biggest investors came from Singapore, USA, Japan and Australia respectively.

For the first half year of 2012 the total FDI was USD 11.3 billion, which is a record amount for Indonesia. The domestic direct investment was about USD 4,2 billion over the same period.

The single largest investment was made in a new USD 500 million ferro-nickel plant that is 90% controlled by Eramet SA, a French mining and metals group.

In July, the United Nations Conference on Trade and Development (UNCTD) reported that Indonesia raised two notches to the fourth place compared with 2011 among other FDI destinations, only being surpassed by China, US and India.

In the last few weeks, a Taiwanese company: Foxconn or Hon Hai in Chinese has confirmed that they are conducting a feasibility study to build a factory in Indonesia with an initial value of USD 1 billion. The total value could reach USD 10 billion if all plans would be realized. On 1,000 hectare of land a Silicon Valley style project would offer work for more than 1 million people.

The above shows that “foreign” investors still see Indonesia as an attractive investment country.

The echoing fear of the analysts came from some major announcements recently made:

• Bank Indonesia announced new rules which limit the bank ownership to 40% and even lower percentages if the new owners are non-financial institutions or individuals. The ownership may exceed these percentages only if the owner gets approval from Bank Indonesia. Although this is a stricter rule than the previous one whereby foreign investors could own up to 99%, in comparison with countries like Thailand (foreign ownership limited to 25%) and Malaysia (foreign ownership limited to 30%), Indonesia actually allows a higher foreign ownership, even under the new rules.
• Other announcements were regarding the ban of export raw ore by 2014 which forces mining companies to set up local smelters or process it locally. In addition another law which was also introduced requires divestment of up to 51% of interest held by foreign investors by the end of the 10th year of production and prohibition of exporting coal with calorific value of less than 5,700 kCal

Clearly Indonesia wants to profile itself not as a third world country anymore which can only supply cheap labor and produce simple basic products. Capability to process minerals inside the country, production of high tech equipment, social media tryouts like Harpoen, are activities that can assist in commanding a better ranking in the world, despite a few hitches along the road. It would be interesting to observe the Q3 and Q4 FDI figures to see if the worry of analysts proves to be worthy at all.