More foreign investments expected for Indonesia

While current account (C/A) deficit has narrowed to 2% of GDP in 1H15, some risks still remain, which may widen again to 2.5% in 2016. The improvement in trade balance has been due to plummeting imports rather than a sharp recovery in export growth. If investment growth were to recover in 2016, expect to see import growth climbing up as well. The monthly trade surplus consistently seen this year is unlikely for 2016.
 
But C/A deficit does not have to be a problem if it is financed by long-term, stable, capital flows. C/A deficit averaged 3% of GDP in the past 3 years, compared to the 1.5% of GDP average of net foreign direct investments (FDI) during the same period. Should there be a significant rise in net FDI going forward, C/A deficit will be less of a problem. The gross FDI data for 3Q15 was heartening as it was better than our expectations. Up until Sep15, gross FDI reached USD 21.3bn. This is likely to mean that the total for the year may be closer to USD 28bn, the average for the past 2 years, than the USD 25bn that we have initially projected.

Even if there are challenges in the short-term, most investors remain optimistic on the longer-term prospect of the economy. On the other hand, the government stays committed to boost investment growth and recent signs have been encouraging. During his trip to the US, President Jokowi witnessed bilateral investment agreements worth a total of USD 20bn. The government's policy packages since September have focused on various de-regulations to ease the cost of doing business. Most importantly, the State Investment Agency (BKPM) has signalled that the authorities will revise its negative investment list, opening up more sectors to foreign investments.