Indonesia finance minister sees investment, growth

Jakarta (ANTARA News) - Indonesia's finance minister said investors are returning to Southeast Asia's biggest economy, following the government's steps to tackle corruption and improve the overall investment climate.

Sri Mulyani Indrawati, an economist who was appointed finance minister by President Susilo Bambang Yudhoyono in 2005, said that Indonesia has seen a recovery in foreign direct investment and is now on a faster growth track.

As finance minister, she has focused on cleaning up the country's notoriously corrupt tax and customs departments, putting in reputable senior officials and paying higher salaries so that employees are less tempted to seek bribes.

"We are trying to lay the foundations for an attractive investment climate," she told Reuters in an interview.

"Some of those policies take time so if you talk about tax, customs, bureaucracy reform, if you talk about infrastructure, corruption, land issues, national, local government - not all of them have been overcome successfully, but for some of them there is some progress."

Foreign direct investment (FDI) in Indonesia climbed to $8.54 billion in the first nine months of 2007, well ahead of the $5.98 billion invested in the whole of 2006, and not far off the record $9.86 billion achieved in 2000.

Indonesia desperately needs to attract foreign investment in order to improve its creaking infrastructure and create jobs.

Open unemployment is 9.75 percent or about 10.5 million people, but an estimated 30 percent of the labour force is either jobless or under-employed.

Investors have frequently cited corruption, a weak legal system and tough labour laws as deterrents.

Indrawati said that foreign investment has been mainly in the pharmaceuticals and chemicals sectors, as well as in the food sector, but she expects the mining and agricultural sectors to attract more foreign funds in future.

Strong Growth

The rise in FDI is one of the reasons why economic growth is likely to remain strong, she said.

"According to many leading indicators such as tax, customs, imports of capital goods, foreign direct investment realisation, bank lending, corporate bond issues, all those show capital spending is increasing," Indrawati said.

She said she expects the economy to grow between 6.2-6.4 percent in the third quarter, accelerating to 6.5 percent in the final quarter of the year, due to strong investment and consumption.

Indrawati said the economy would expand 6.3 percent in 2007 -- the fastest pace in 11 years -- meeting the government's target. A Reuters poll in September predicted the economy would grow 6.1 percent in 2007.

Growth momentum will remain strong in the first half of next year, she said, but a slowdown in global growth could affect Indonesia in the second half of 2008. The government has forecast growth of 6.8 percent next year.

Indonesia plans to raise money in the international bond market in the first quarter of next year, Indrawati said, although she declined to give details of the bond size or currency.

Indrawati also said that the recent sharp rise in global oil prices would have a positive impact on the state budget as every $10 increase in the oil price above $60 -- which is the government's base price for its budget calculation -- adds

300-500 billion rupiah ($32.9-$54.9 million) to the budget.

Indrawati said that even though Indonesia is a net importer of oil, the higher oil price would not hurt state finances because Indonesia exports gas and the price of those exports would also rise in line with the higher oil price.

Indonesia is the only OPEC member in the Asia-Pacific region, but about 30 percent of its oil product consumption has to be met by imports due to flagging output. However, the country is a major exporter of liquefied natural gas.

The finance minister warned that the subprime mortgage crisis in the United States may weaken global demand next year, and that this in turn could hurt demand for Indonesia's key commodities, including palm oil and minerals such as coal.

"For next year, in order to achieve 6.8 percent (growth), we are going to be very vigilant. I am still quite optimistic on the first semester because this very strong momentum is still on going," she said.

"In the second semester we have to very vigilant, the impact of this subprime mortgage problem or credit crunch in the United States and Europe will affect global growth," she said.