Indonesia's FDI numbers continue to impress

Foreign direct investment rose by 30.3% for the first half of 2012.

DBS Group Research noted:

Foreign direct investment (FDI) numbers continue to impress. For the first half of this year, FDI (figures from BKPM) rose by 30.3% compared to the same period last year.

FDI is important not just as a source of industry development, it is critical in the financing of the current account deficit (DBSf: 0.9% of GDP in 2012). This is even more pertinent considering that risk aversion has hit capital flows and may persist in the coming months amid further global economic uncertainty.

Primary sector FDI (mining and plantation) picked up in a big way in 1Q10 and the high level of investment was maintained in part due to elevated commodity prices. This has not been the case over the last two quarters.

Moreover, rules placing restrictions on the export of metal ores as well as a compulsory divestment scheme (foreign shareholders of Indonesian mining companies have to divest 51% of their shares 10 years after production commences) may deter foreign investors.

Notably, primary sector FDI made up a sizable 26% of total FDI in 1H, up from an almost negligible amount in 2009. It is not surprising that concerns have surfaced about the sustainability of overall FDI going forward.

However, other components of FDI have also showed strong improvement. In particular, FDI in the secondary sector (45.6% of total FDI) surged by 68% in 1H compared to the same period last year. The improvement was broad-based across the different industries including food, chemical & pharmaceuticals and motor vehicles.

Foreign interest in the secondary sector is encouraging and suggests that a drop off in primary sector FDI could be mitigated to an extent. It also reduces the risks that there is an over investment in commodity-related industries leading to the Dutch disease.