Economy of Indonesia: Shifting from Consumption to Investment?
Thomas Lembong, Head of Indonesia's Investment Coordinating Board (BKPM), said the 5.01 percent year-on-year (y/y) economic growth pace of Indonesia in the second quarter of 2017 was rather disappointing as consumption remained bleak. Only Indonesia's export and investment realization showed an improvement, Lembong added. But, overall, Indonesia's economic growth stagnated.
Growth of gross fixed capital formation (GFCF) picked up in Indonesia at a pace of 5.35 percent (y/) in Q2-2017 due to rising investment (accelerating from a growth pace of 4.18 percent in the same quarter one year ago). However, Lembong said direct investment actually only forms a small portion of GFCF. The contribution of state-owned companies expenditures, re-investment by corporations, and government spending are much bigger.
However, corporations' re-investment remained weak over the past quarter as companies are holding back on expansion plans. That also partly explains why funds in Indonesia's banking sector have risen sharply over the past couple of quarters. Therefore, key to boost the Indonesian economy - in the words of Lembong - would be rising confidence among businesses. The government can help to boost confidence by further slashing regulations that are regarded as undermining the attractiveness and competitiveness of Indonesia's business climate. With Indonesia's business and investment environment still being difficult due to excessive regulations, Indonesia not only misses out on investment but the country's competitors become stronger because investors turn to these markets.
Investment growth in Indonesia during Q2-2017 was better compared to household consumption growth in Q2-2017. Lembong said that this development is no surprise because Indonesian President Joko Widodo already stated earlier that he wants the government to aim for a shift from consumption to investment. Therefore, this development is in line with government targets. In fact, Lembong sees plenty of room for further growth of foreign and domestic direct investment realization in Indonesia up to 2019 when the first term of Widodo ends.
Although Lembong could not deny or confirm anything, there are rumors that the Indonesian government will again revise the Negative Investment List before the year-end in an attempt to attract more foreign direct investment (FDI).
The tourism sector is one of the sectors that should play a strategic role in the shift from consumption to investment, Lembong said. Moreover, this sector would open plenty of employment opportunities for local Indonesians, as well as in other sectors that are related to tourism, for example transportation. Another advantage is that investment in the tourism sector tends to be realized much quicker compared to investment in other industries (when complex factories need to be developed). Meanwhile, on the long-term there should be a continuous flow of foreign exchange earnings brought in by the arrival of foreign tourists. Lembong added that investment in the tourism sector should help to compensate for bleak foreign demand for Indonesia's export products.
According to data from the BKPM released last month, total direct investment realization in the first half of 2017 in Indonesia reached IDR 336.5 trillion (approx. USD $25.3 billion), or 49.6 percent of the BKPM's full-year target.