Investment set to kick in to drive economic growth

Urip Hudiono, The Jakarta Post, Jakarta

With the enactment of the new Investment Law, the central bank says it expects that Indonesia will be able to attract more foreign direct investment (FDI) -- rather than just portfolio investments -- so as to produce higher and more sustainable growth this year.

Bank Indonesia Governor Burhanuddin Abdullah said Friday that with the more pro-business Investment Law, domestic investment should also increase.

The central bank, therefore, believed that investment in the real sector would become the main engine of growth for the country's economy this year.

"The past two years has seen growth being built on consumption and exports. However, we expect investment to be the main growth engine this year," he said.

Burhanuddin said investment would have to grow by 13 percent this year, from only 2.9 percent last year, to secure overall economic growth of between 5.7 and 6.3 percent.

For her part, Finance Minister Sri Mulyani Indrawati has stated that 12.9 percent growth in investment would be needed to achieve the government's 6.3 percent growth target for this year, and 6.8 percent for next year. BI is predicting growth of between 5.7 and 6.7 percent for 2008.

Realized FDI increased 15 percent to US$2.99 billion in the first quarter, while new FDI approvals jumped sixfold to $14.13 billion in the same period, the latest data from the Investment Coordinating Board (BKPM) shows. The BKPM figures do not include investments in the oil, gas and mining sectors, or the financial services sector, which are monitored by other agencies.

Burhanuddin said that foreign investment flows into Indonesia still largely took the form of short-term portfolio investments -- mostly invested in the stock market, central bank bills and government bonds.

Apart from government bonds, the proceeds of which can be used to finance infrastructure projects, investments in the stock market and central bank bills provide only a limited contribution to growth, and leave the country vulnerable to capital flight at the slightest economic shock.

BI has in the past warned that up to $10 billion invested in the capital markets could be prone to capital flight. However, it has remained upbeat about monetary stability, given that the country's foreign exchange reserves are likely to reach $51 billion by the year's end.

Speaking separately, BI Deputy Governor Aslim Tadjuddin said that Indonesia's forex reserves had reached $49.4 billion this week, from $47.6 billion last month.

Burhanuddin further said that the current stability in the country's macroeconomic situation and the recent passing of the Investment Law were expected to lead to eventually lead to a portion of the portfolio investments being converted into longer-term FDI.

The business community, however, was still awaiting the issuance of the ancillary regulations necessary to give effect o the new Investment Law, especially those listing the sectors that are will remain closed to foreign investment.

Burhanuddin also warned of the need for the banking industry to keep non-performing loans in check, particularly those resulting from poor debt management, so that the industry would have more room to increase lending.

"Lower NPLs mean lower provisions to cover them, so that the difference can be used for more productive lending," he said.

The country's banks have been criticized for their sluggishness in increasing lending to the real sector, preferring instead to invest their excess funds in central bank bills. Total outstanding BI bills stood at Rp 237 trillion in February, and are expected to reach Rp 300 trillion by the year's end. This will cost the central bank at least Rp 100 trillion in interest