Indonesia Disappoints as an Investment Destination

on Sep 28, 2012

As Asia’s fifth-largest economy, Indonesia has long been perceived as an appealing investment destination and has oft been hopefully mentioned in the same breath as India and China. This idea is most visible in the concept of “Chindonesia”, which sees China, India and Indonesia collectively as the most important developing economies in the region and the best growth markets for investors. Although two recent reports showed that the country enjoys economic growth of about six percent, the Financial Times reported that investing in Indonesia might not be living up to the hope of equalling the appeal of investing in the other two Chindonesia destinations.

On 27 September 2012, the FT reported that Indonesia was a “not so hot” investment destination, with the country ranking at the bottom in CLSA’s survey of Asian markets, scoring half the levels of the top market (Singapore) for rules, enforcement and regulatory environment. According to the report, Indonesia is one of the locations where corporate governance is a “major issue”.

!m[](/uploads/story/481/thumbs/pic1_inline.png)The FT also notes that nearly two-thirds of the country’s value-added growth in fact comes from small and medium-sized enterprises. In addition, according to an HSBC estimate, out of the $26 billion (£16 billion) in net equity inflows into Asia outside of Japan, less than $1 billion have gone into Indonesia in 2012. As it seems, there are very few opportunities for investing in Indonesia, with free floats accounting for only an average two-fifths of the market capitalisation of the top 20 stocks.

Meanwhile, reports from the International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Development (OECD) indicated some six percent economy growth in Indonesia, a rare phenomenon given the global economic downtrend.
The IMF report forecast that Indonesia’s economic growth would slow to six percent in 2012, from 6.5 percent, but will accelerate to 6.3 percent in 2013, Bloomberg reported on September 26th. In its assessment of Indonesia’s economy, the IMF noted that the country’s central bank should be ready to increase its policy rate if inflation, estimated to reach 5 percent by year-end, accelerates further. “There are significant external risks to the outlook, accentuated by domestic factors,” the IMF staff wrote in its report, as quoted by Bloomberg.

The OECD report gave a similar recommendation, noting that the country should be ready to tighten monetary policy and reduce energy subsidies to focus on infrastructure needs. “Rethinking the spending mix is required to achieve the authorities’ ambitious development objectives, fund the 2014 establishment of public health insurance and at the same time eliminate the budget deficit by 2015 as envisaged in official medium-term economic projections,” the OECD said in the report, as quoted by Bloomberg.

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And while the country is worth watching on account of its economic growth, investing in Indonesia would largely depend on the country’s ability to improve corporate governance and thus earn investor confidence. OECD notes in its report that stronger institutions and better policy are needed for achieving the government’s goal of elevating the nation to one of the world’s ten largest economies by 2025, seen by many observers as its rightful place.

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