By ERIC BELLMAN
Moody's Investors Service raises Indonesia's credit rating to investment grade for the first time in more than a decade but the country still faces risks to its economy. The WSJ's Jeffrey Ng talks to Deborah Kan.
Foreign direct investment into Indonesia surged to a record last year in the latest sign of rising global interest in Southeast Asia's largest economy.
The data indicates Indonesia is emerging as a more serious regional competitor as Asian economies compete for foreign investment, especially at a time of weakening economic growth. The investment news came a day after Moody's Investors Service became the second major ratings firm to lift Indonesia's debt rating to investment-grade status, a move that is expected to make it easier for Indonesia to attract foreign capital.
Foreign direct investment in Indonesia grew 20% last year to 175 trillion rupiah ($19.3 billion), the country's Investment Coordinating Board said Thursday. At that rate, Indonesia now appears to be significantly outpacing many other Asian countries that used to easily surpass it in drawing foreign money, such as Thailand. China still attracts much more, with $116 billion in FDI in 2011.
The strong numbers in Indonesia come despite continued complaints from many businesses in the U.S. and elsewhere that say Indonesia lacks sufficient legal protections and adequate infrastructure to sustain big investments. That Indonesia is able to draw so much foreign money despite those lingering concerns, which Indonesian officials say are overblown, suggests investors are increasingly willing to overlook the country's shortcomings to get access to its vast natural resources and large consumer market of more than 200 million people. It also suggests Indonesia could draw even more big-ticket investments if further economic reforms are passed.
Singapore, Southeast Asia's financial capital, was the top foreign investor in Indonesia during the year, followed by Japan and the United States, and then the Netherlands and South Korea. The industries that attracted the most international investment were transportation, mining and utilities.
Indonesia has become a darling of some international companies and investors in recent years as its strong economic expansion and relative political stability have given more people confidence in the market, analysts say. Its gross domestic product has expanded more than 5% in seven out of the past eight years. Indonesia expects it to grow more than 6% this year.
Reuters
A man worked at the construction site of the Rasuna Epicentrum superblock in Jakarta in 2010.
A growing number of private-equity and mutual funds, meanwhile, have been looking for opportunities in Indonesia, and the rising direct investment trajectory gives them more confidence about the country, said Chad Holm, chief executive officer of Yawadwipa Companies, which is trying to set up a $1 billion Indonesian private-equity fund.
"It is multinational companies that are coming to put bricks and mortar down," he said. "That tells us that smart foreign capital that does not necessarily have deep knowledge of the local market is getting comfortable with investment in Indonesia."
The numbers represent a major turnaround from the first half of the last decade, when Indonesia actually had a net outflow in foreign direct investment as international companies closed up shop in the aftermath of the late-1990s Asian financial crisis, according to data from the United Nations Conference on Trade and Development. Since then, the country has paid down some of its debts and restored political stability under President Susilo Bambang Yudhoyono, and its foreign direct investment surpassed even Thailand in 2010.
In addition to Moody's, Fitch recently lifted Indonesia's debt rating to investment grade for the first time in 14 years. This optimism about the stability of the country is expected to free up conservative investors, such as U.S. pension funds, to eventually start parking some of their money in the country.
Indonesia continues to rate poorly on international indexes measuring the perception of corruption published by Transparency International, which most recently ranked Indonesia 100 out of 183 countries, with 183 being perceived as the most corrupt. Overstretched infrastructure means companies have to shoulder the extra expense of building their own roads and power plants. Political and economic reforms the country needs to grow are often blocked by political squabbling, analysts say.
"To deliver on the growth story and attract even more investments, Indonesia needs to take more decisive steps to implement key outstanding structural reforms," said Leif Eskesen, chief economist for India and Asean at HSBC Global Research in Singapore.
Still, Indonesia is confident that the money flow won't be turned off even if global economic jitters make companies and money managers more cautious.
Trade Minister Gita Wirjawan, who is also chairman of the Investment Coordinating Board, projects that FDI will set another record this year, up 25% from 2011.
Among the projects already under way: Posco plans to spend up to $3 billion on a steel-making project in Indonesia by the end of 2013. Suzuki Motor Corp. will spend $779 million to build an engine plant and increase output in Indonesia. Toyota Motor Corp. has committed $337 million to expand production capacity, and Caterpillar Inc. will invest $150 million to build a new factory to produce mining trucks for customers in Indonesia and elsewhere in Asia.
"All these companies are not stupid. When they weigh up the risks and rewards they feel it is a place they can do stuff," said James Bryson, director of investment advisory PT HB Capital Indonesia. "They are realizing that Indonesia isn't broke or broken."
Write to Eric Bellman at eric.bellman@wsj.com
Correction
James Bryson is director of investment advisory PT. HB Capital Indonesia. An earlier version of this article incorrectly called the firm TTHB Capital Indonesia.
James Bryson is director of investment advisory PT. HB Capital Indonesia. An earlier version of this article incorrectly called the firm TTHB Capital Indonesia.
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