Indonesia back on investment radar screen (Feature)

By Ahmad Pathoni Aug 2, 2010, 8:07 GMT

Jakarta - A decade ago Indonesia could be dismissed as the sick man of Asia, but hard-won economic and political stability has put the world's fourth most populous country back on the global investment radar screen.

For the first time since the 1997-98 Asian financial crisis that hit South-East Asia's largest economy the hardest, Japan's rating agency upgraded Indonesian debt to investment grade this month.

There are also expectations that the world's three leading rating agencies - Standard and Poor's, Fitch Ratings and Moody's Investor Service - will make similar moves soon, analysts said.

'Where else investors can go to after China and India?' said Fauzi Ichsan, chief economist for Standard Chartered Bank Indonesia.

'There are several things that make Indonesia attractive: It has political stability and it is the biggest market in South-East Asia with 240 million people, a growing middle class, and abundant natural resources,' he said.

Ichsan said he was confident that the three global rating agencies would upgrade Indonesia's rating to investment grade before 2012.

'Indonesia's macroeconomic indicators are better than some investment grade economies,' he said.

Moody's Investors Service last month upgraded its outlook for Indonesia's debt and currency, the rupiah, to positive from stable, citing stability and growth potential.

Indonesia's economy is expected to grow 6 per cent this year, compared with 4.5 per cent in 2009, the fastest in the world after China and India.

Investment, both foreign and domestic, rose 40 per cent in the second quarter compared with the same period a year ago, the head of the Investment Coordinating Board, Gita Wirjawan, said last week.

'These figures are really encouraging and show that steps we have been taking are bearing fruit,' said Wirjawan, a 44-year-old former investment banker with Goldman Sachs and JP Morgan.

'Confidence among foreign investors in Indonesia's investment climate has improved,' he said.

The board said realized foreign direct investment stood at 35.4 trillion rupiah (3.92 billion dollars) in the first quarter, an increase from 25 trillion rupiah year-on-year.

The Asian financial crisis crippled Indonesia after years of strong economic growth and contributed to riots in the capital Jakarta that led to the downfall of long-time dictator Suharto in 1998.

President Susilo Bambang Yudhoyono, who was elected for a secon five-year term in 2009, has been credited with steering Indonesia to economic and political stability after years of turmoil that followed the strongman's departure.

Unlike investment-driven China, Indonesia's economy has mainly relied on domestic consumption for years.

Investment chief Wirjawan, who was appointed to the ministerial-level post at the start of Yudhoyono's second term, is seeking to move Indonesia to a more investment-centric and industrialized model.

He has also been trying to woo Chinese businesses to invest and capitalize on a strong yuan by spending more in Indonesia.

The investment board has also moved to simplify the investment regime, allowing a business license to be issued in five hours, compared with seven days in the past.

Last week the Indonesian Footware Association announced that four South Korean and Taiwan companies producing shoes for brands such as Adidas and Nike were preparing to relocate to Indonesia from Vietnam and China, with investments worth 200 million dollars.

The association said it expected at least 10 foreign shoe producers to invest in Indonesia by the end of 2010 with total investments of 600 million dollars.

But Aldian Taloputra, economist with Mandiri Securities, said that despite the progress, a messy bureaucracy and poor infrastructure - such as congested roads and frequent blackouts - remained major impediments to attracting more foreign investment.

'The investment board has promised to simplify the licensing process but we'll have to see whether this policy is really implemented,' he said.

Ichsan of Standard Chartered said that a lack of infrastructure should open opportunities for investors to put money in in the sector.

'Prospects for investment in the infrastructure sector make Indonesia more attractive,' he said.