Firstly, foreign direct investment (FDI) into Indonesia expanded by 2.1 percent year-on-year (y/y) - in rupiah terms - in the fourth quarter of 2016 (this excludes direct investment in banking and the oil & gas sector), implying a significant slowing down compared to the annual growth pace of 7.8 percent in the preceding quarter. In fact, it was the smallest quarterly increase over the past five years. Slowing investment realization immediately leads to some concern whether overall economic growth of Indonesia may also not be as positive as earlier assumed. However, despite this concern we still expect to see a 5.0 percent (y/y) gross domestic product (GDP) growth in full-year 2016, accelerating from 4.8 percent (y/y) in the preceding year.
Slowing foreign investment in Indonesia in the last quarter of 2016 should not be a surprise because both the world and Indonesia were plagued by a high degree of uncertainty. Firstly, Donald Trump's surprise victory in the 2016 US presidential election in early November 2016 was a major shock (rocking global financial markets) and implies a major change of US economic and political policies. While, after some initial hesitation, US stocks are touching record highs on the back of the US Federal Reserve's accommodative monetary policy and expectation that the Trump administration will boost the US business environment (and thus economy), emerging markets were plagued by severe capital outflows in Q4-2016.
Secondly, ethnic and religious tensions were rising steeply in Indonesia after Christian, ethnic Chinese Jakarta Governor Basuki Tjahaja Purnama (Ahok) became center of a blasphemy case. It led to several big demonstrations organized by hardline Muslim groups that urged the government to arrest Ahok. Although tensions have somewhat eased in 2017, Ahok's trial is still ongoing while various groups in Indonesia are accusing each other of blasphemy, anti-Pancasila behavior, and discrimination. As such, tensions could easily rise again as we approach Jakarta's regional election in February 2017 (Ahok participates in this election) as well as the verdict in Ahok's blasphemy case near the end of Q1-2017.
Considering the global and local context it is understandable if part of the investor community prefers to wait and see first before conducting any investment.
When we take a look at Q4-2016, Indonesia collected IDR 159.4 trillion in total investment realization (covering both FDI and DDI), up 9.6 percent (y/y) compared to realization in the preceding year. It resulted in an additional 434,466 employment opportunities in Indonesia in Q4-2016.
Total investment realization in full-year 2016 reached IDR 612.8 trillion, up 12.4 percent compared to investment realization in the preceding year, and 3 percent above the investment target that was set by the BKPM for 2016 (IDR 594.8 trillion). For 2017 BKPM targets to attract IDR 678.8 trillion worth of direct investment.
BKPM Chairman Thomas Lembong said "the investment realization in Indonesia in 2016 that exceeds the national target by 3 percent shows a positive sign. It shows not only that the investment performance remains growing amid the global and regional economic slowdown, but also shows a multiplier effect, such as creating more work opportunities. It also portrays a steady investor trust to the Indonesian economy, besides the prospect of long-term economic growth in the coming years".
In terms of geography direct investment realization in Indonesia is still highly concentrated on the island of Java. About 53.6 percent of total direct investment was realized on Java. However, the positive development is that investment realization outside Java grew 14.4 percent compared to 2015, hence somewhat limiting widening inequality between Java and the "Outer Islands".
Singapore remained the biggest foreign direct investor in Indonesia in the last quarter of 2016. Meanwhile, China overtook Japan as the second-largest foreign investor. China invests mostly in the construction of smelters and power plants. However, it should be understood that many Chinese companies use their Singapore unit to invest in Indonesia