August 14, 2025
JAKARTA – Indonesia has seen foreign investors’ appetite weaken despite surging domestic investment that took up the slack.
Analysts cited global uncertainty, especially jitters over United States import tariffs, as a factor keeping foreign capital out of emerging markets. Adding to the challenge, rival Southeast Asian nations have been upping their game, chipping away at Indonesia’s share of the pie.
Foreign direct investment (FDI) in Indonesia fell 6.95 percent year-on-year (yoy) to Rp 202.2 trillion (US$12.4 billion), accounting for only 42.3 percent of total investment in the second quarter of this year. Meanwhile, domestic investment made up the remaining 57.7 percent at Rp 275.5 trillion, according to the latest report from the Investment Ministry.
Donny Donosepoetro OBE, CEO of Standard Chartered Indonesia told The Jakarta Post on Monday that foreign sentiment globally had been generally cautious so far this year, shaped by heightened geopolitical tensions in various regions and uncertainties surrounding US trade tariff policy.
“These uncertainties have the potential to alter the global trade landscape and weigh on global growth through higher prices from tariff implementation,” he said.
On the domestic front, he added, budget refocusing earlier this year and a relatively modest growth outlook have also contributed to more cautious consumer spending and investment decisions.
Chief Indonesia and India Economist at HSBC Global Research Pranjul Bhandar also said that many countries had taken a hit amid global uncertainties, particularly with the US tariffs that had been imposed, which prompted companies to prefer saving over investing.
“With $25 billion of exports going to the US from Indonesia every year, a tariff of about 19 to 20 percent could actually hurt growth by about 0.3 percentage points,” she said during a virtual media on Friday.
In the equity market, the Indonesian Stock Exchange (IDX) recorded the largest share of annual outflow at Rp 62.4 trillion on Aug. 5. Despite the mounting exits, the Indonesian Composite Index (IHSG) nearly hit its all-time high set in September last year, Bloomberg reported.
Head of Equity Strategy Asia Pacific HSBC Global Research Herald van der Linde said in the same media briefing that the recent growth in the country’s capital market was not driven by foreign investors, but rather largely by domestic funds and retail investing, in which the local investors accounted for about 50 percent of all the trades over the past months.
Some initial public offerings (IPOs) and mid-cap stocks, such as in the energy and technology sectors, had pulled the market higher. However, he noted that Indonesia still “needs to make itself attractive” as an investment destination in the ASEAN region, especially as Malaysia and Singapore step up their IPOs and companies listed on their markets.
“Vietnam might as well soon get upgraded from a frontier market to an emerging market. That means that within ASEAN, Vietnam is becoming sort of a contender for the ASEAN pool of money […] therefore, there’s more competition,” he explained.
Better times ahead?
Pranjul from HSBC said the looming uncertainties over tariffs could bring negative growth in the short run, but she pointed out that the rejigged global supply chains could also serve as a medium-term opportunity for Indonesia to scale its up mid-tech manufacturing.
“Multinational companies are looking for new destinations for where they can produce and sell. And my sense is once the tariff storm settles, Indonesia can actually benefit,” Pranjul said.
Indonesia’s exports to China have been dominated by commodities, while destinations like the US and European countries import Indonesian consumer goods like textiles, apparel, footwear and furniture. However, Pranjul said these exports were miniscule.
“For instance, only 9 percent of Indonesia’s exports go to the US. If you look at Indonesia’s apparel exports, it’s only 25 percent of Vietnam’s apparel exports. So, Indonesia is selling these consumer goods, these mid-tech goods, but it needs to be scaled up,” she noted.
By scaling up production, Indonesia could attract more manufacturers looking for new destinations, as well as spur corporate investment and growth in the country.
Pranjul added that the reforms, which could take years, should also include efforts to enhance infrastructure, expand more trade agreements, particularly with advanced economies, develop the country’s skilled workforce and streamline business practices.
“If Indonesia can get all of this right, I think in a two to three-year horizon, this could be an opportunity for FDI inflows and for growth,” she concluded.
Donny from Standard Chartered also expressed optimism about Indonesia’s outlook for the second half of this year, supported by expectations of a stronger growth outlook and greater clarity on US trade policy.
Several key factors to sustaining investor confidence and further unlocking investment flows, he added, include accelerating government spending, particularly in priority programs that can drive economic growth.
He also emphasized the importance of maintaining fiscal discipline, including by keeping the budget deficit capped at 3 percent of gross domestic product and continuing structural and institutional reforms to attract private investment, especially in higher value-added sectors.
Donny highlighted that despite the increasing outflow, Indonesia’s bond market remained resilient, citing that it still posted net inflows of around $3.3 billion between the January and July period.
He attributed the growth to the easing of uncertainties about the second half of the year and the strengthening rupiah, which gave Bank Indonesia (BI) room to ease monetary policy and further support the bond market.