Indonesia Focuses on Improving Investment Climate

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Dec. 6 – In Indonesia, securing long-term investment remains a high priority following a summer of sudden capital outflows.

“We need to implement breakthroughs to improve our investment climate,” said Perry Warjiyo, Deputy Governor of Bank Indonesia, the country’s central bank. “That’s the key to attracting foreign direct investment.”

There has been some progress in this regard. Vice President Boediono has worked towards simplifying business permit processing, while Coordinating Minister for Economic Affairs Hatta Rajasa has announced plans to encourage FDI into previously closed industries such as airport and seaport management and pharmaceuticals. Fuel subsidies have also been reduced.

But much more reform will be needed in Indonesia’s notoriously protectionist economy. Corruption continues to slow progress in public investment projects, and overly stringent regulations repel foreign entry into key industries such as mining. The government also enforces a “negative investment list,” which prohibits any foreign participation in industries such as financial services, tourism, healthcare and advertising.

Investors began to flee Indonesia’s financial markets in May after the Federal Reserve hinted at tapering its quantitative easing programs. As a result, Indonesia’s capital account has experienced a net US$1.4 billion deficit so far this year, compared to the net US $1.7 billion inflows recorded in 2012.

Further, Indonesia’s rupiah has been the worst-performing Asia-Pacific currency this year, falling by 21 percent against the dollar to hit a four-year low earlier this week. In November, the Finance Ministry raised just US$190 million from an auction of dollar-denominated bonds, far short of the US $450 million figure they targeted.

Outflows began to ease in July after Janet Yellen, an advocate of continued stimulus programs, was confirmed as the next chairman of the Federal Reserve.

Still, the effects of the tapering scare have exposed vulnerabilities in capital infrastructure that could be damaging once western central banks finally do cease their quantitative easing programs.

“Uncertainty over the tapering of the US quantitative easing will still affect short-term sentiment in the market,” said Maynard Arif, head of research at DBS Vickers Securities Indonesia. “In addition, our macroeconomy will face more challenges compared to in the past few years.”

These challenges include regulatory uncertainty in advance of next year’s presidential elections as well as the need for the capital account to finance a burgeoning current account deficit.

“We need to have a better capacity to attract more long-term funds to finance the shortfall,” said Warjiyo.

Indonesia recorded a third-quarter trade deficit of $8.4 billion, or 3.8 percent of GDP.

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