June 27, 2023
JAKARTA – The World Bank expects Indonesia’s economy to slow down this year as foreign direct investment (FDI) plays a smaller role in the country’s gross domestic product (GDP) than it did before the pandemic.
“The FDI in dollar and rupiah has been stable. It’s not picked up or declined. But as a share of the economy, it has declined compared with before the pandemic. This is also reflective of the fact that the economy as the denominator has grown,” World Bank senior economist Wael Mansour said in a press briefing on Friday.
In its latest Indonesia Economic Prospects (IEP) report, the World Bank forecasts that net FDI will increase to 1.3 percent of GDP this year, up from 1.1 percent last year. However, that is still below the 1.8 percent of GDP seen in 2019.
The World Bank also notes that FDI has been a steady source of external financing over the past three years amid more volatile and shorter-term portfolio and debt flows.
However, the investment opportunity in mature sectors, such as basic infrastructure and real estate, may have “been done,” according to Mansour.
“We need to attract [foreign investment] for more complex sectors. It can be [downstream industries], new capital, health and telco. There are a lot of options,” Mansour said.
Habib Rab, lead economist at the World Bank, said FDI was low historically because of several market restrictions. However, those concerns had been alleviated with the government’s implementation of the omnibus law on job creation, which the international financial institution called “flagship reforms.”
“Whether the positive impact on FDI is sustained or not will depend on three factors: The existence of a large domestic market, the opportunity to process natural resources, and manufacturing efficiency,” Rab said at the same press briefing.
Banjaran Surya Indrastomo, chief economist at Bank Syariah Indonesia, opined that the FDI stagnation was temporary and that the fundamentals of Indonesia’s economy were still strong.
“The country also still has an investment grade [credit rating], so investors’ appetite for Indonesia will be maintained,” Banjaran told the Post on Monday.
Similarly, Bank Permata chief economist Josua Pardede said investors would be back as they appreciated the country’s prospect based on the demographic bonus and downstream industry development.
Despite the somewhat sluggish FDI projection, the World Bank has a more optimistic forecast for investment in productive assets, as it expects gross fixed capital formation to grow by 5 percent this year and then accelerate to growth of 5.9 and 6.1 percent in the next two years.
The International Monetary Fund in a report published on Monday also projects 5 percent growth in gross fixed capital formation this year, but it only sees that number rise to 5.4 percent for both 2024 and 2025.
According to Mansour, Indonesia has emerged successfully from the pandemic as reflected in strong macroeconomic indicators, such as inflation coming down sooner than expected and a reduction in the debt burden both in the public and private sectors.
“However, there are still indications of decline in productivity, deceleration in investment and [a] competitiveness metric that is still below [that of] peers,” Mansour said.
While the country posted 5.3 percent GDP growth last year, the World Bank projects it to moderate to 4.9 percent this year, and rise only marginally to 5 percent in each of the following two years, with growth continuing to be supported by household spending as inflationary pressure subsides.
The International Monetary Fund, meanwhile, forecasts a similar pace of GDP growth at around 5 percent this year. According to its Article IV Consultation report, the moderation is caused by tighter monetary policy and the normalization of commodity prices.
“I think investment in the country tends to decline due to the [election] year , global uncertainty and low commodity prices,” Rully Arya Wisnubroto, a senior economist at Mirae Asset Sekuritas, told the Post on Monday.
He concurred with the World Bank’s GDP growth forecast of 4.9 percent for this year.
The IEP report suggests that Indonesia could achieve its goal of becoming a high-income country by 2045, but this may require further policy reforms to tackle specific constraints in areas such as finance, procurement and land, or within sectors that prohibit contestable markets.
Mansour likened Indonesia’s economy to a soccer club that had just entered a higher league: “It has good players, and right now it needs a different tactic to play at a different level [of competition],” Mansour stated.
IMF directors stressed that the country needed to establish a concrete medium-term fiscal strategy, which could include efforts to increase revenue mobilization, energy subsidy reform and expansion of social protection.
The IMF also said it welcomed Indonesia’s ambitions to increase value added to export goods, attract more FDI as well as facilitate transfers of skills and technology. However, it noted that policies should be informed by further cost-benefit analysis and designed to minimize “cross-border spillovers”.
“In that context, directors called for considering phasing out export restrictions and not extending the ban to other commodities,” the IMF report said.
Editor’s note: This story has been updated with additional details from the World Bank as well as with the IMF’s assessment and expert comments.