UPDATE 3-Direct foreign investment pours into Indonesia despite worries

Mon Oct 22, 2012 12:56pm IST

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By Adriana Nina Kusuma and Rieka Rahadiana

JAKARTA Oct 22 (Reuters) - Indonesia attracted a record $5.9 billion in foreign direct investment in the third quarter, signalling that Southeast Asia's biggest economy remains a hot favourite despite a bleak global outlook and worries about corruption and corporate governance.

In rupiah terms, total FDI in July to September rose 22.00 percent year-on-year to 56.6 trillion rupiah ($5.90 billion), after 30.2 percent annual growth in the second quarter. The third quarter number is a record for any quarter.

Although the increase is less dramatic in dollar terms, and the number is dwarfed by China's $24.34 billion FDI in the same period, it signals that Indonesia's spotty reputation in protecting foreign investors and other worries are being seen as acceptable risks.

India, with an economy twice the size of Indonesia, attracted only $4.43 billion in FDI in the second quarter.

"It's no one factor driving this investment (in Indonesia) but the combination of a well-diversified economy and a consumer base with optimism at an all-time high," said Arian Ardie, COO of Terrasys Energy, a renewable energy consultancy and investment firm.

Earlier this month, British-born financier Nat Rothschild resigned from the board of Bumi Plc, one of the world's biggest coal exporters formed with Indonesian shareholders two years ago in a $3 billion deal. He had earlier pressed for investigations into financial irregularities at the company's Indonesian subsidiaries.

"The vast majority of Indonesian business people are shocked by the appalling impression Bumi PLC has given to potential foreign investors in Indonesia," he wrote in his resignation letter.

"They recognise that Indonesia needs massive FDI in order to sustain its economic growth. The Bumi PLC story is a small but high-profile impediment to ensuring that growth."

Bumi is controlled by the powerful Bakrie family, one of the most wealthy in Indonesia, and partner Samin Tan.

Indonesia's vast mineral wealth, and growing domestic market, appear to be outweighing worries arising from Bumi's troubles.

According to the country's foreign investment board, base chemicals, mining and transportation-telecommunication industries were the main recipients of investment in the third quarter.

"There will be no impact from Bumi cases on investment in Indonesia," Trade Minister Gita Wirjawan told reporters last week.

"That's because our investors see Indonesia as a long-term investment, while Bumi is just a corporate issue which has no relation with our investment climate."

INFRASTRUCTURE

Indonesia recorded total FDI of 175.3 trillion rupiah in 2011, rising 18 percent from a year earlier. FDI was 107.6 trillion rupiah in the first half of this year.

Some analysts however warned that foreign investment could taper off if the government did not improve basic infrastructure.

"Investments in Indonesia are still rather low and FDI has room to grow if the government invests more in basic infrastructure," said Royal Bank of Scotland economist Enrico Tanuwidjaja in Singapore.

"The road density hasn't been growing that much. It's the same for rail, ports and other infrastructure."

Indonesia receives persistently bad scores in Transparency International's corruption index. Labour unrest is also a problem.

Last year, workers at Freeport McMoRan Copper & Gold's unit in Indonesia staged a three-month strike at the company's Grasberg mine in Papua in the biggest industrial dispute in the country.

Hundreds of thousands of factory workers went on strike and rallied on Oct. 3, demanding improvement in contracts and better pay for 16 million outsourced workers in the world's fourth most populous nation.

But increasing wealth of its 220 million people makes for a huge domestic market, while the relatively low average age of its population offers great potential for labour supply.

"Despite the recent strikes and all, and there are labour law issues that need to be resolved, wages in Indonesia are still pretty low compared to say China," said Aninda Mitra, head of economics for Southeast Asia at ANZ Bank in Singapore.

"Moreover, a lot of the investments will be catering to local demand. Indonesia is seen as a sizable economy with a growing middle class and there is great potential for manufacturing to cater to this demand."

Big-ticket investments recently announced include plans by South Korean steelmaker POSCO to almost double its investment in Indonesia to $11 billion over the next five years, from $6 billion currently.

Foxconn Technology Group, the main supplier of Apple Inc , will invest up to $10 billion in Indonesia over 5-10 years, local officials have said.

Domestic consumption makes up more than 50 percent of gross domestic product, supported by a rising middle class and low interest rates.

Indonesia's economy is projected to grow 6.1-6.5 percent in 2012, one of the fastest growth rates in Asia after China and India.

"Bumi may get the headlines, but that's not the Indonesia economic story," said Ardie at Terrasys Energy.

"The economy is being driven by consumer demand, and longer term trends of capital formation the seeds of which were planted 15 years ago."

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