More FDI vital to cover deficit: BI

JAKARTA. The government needs to come up with breakthroughs to attract foreign direct investment (FDI), otherwise the country could have insufficient foreign currency inflows to cover the current-account deficit, the central bank has warned.

In the past, the current-account deficit could be supported by a hefty surplus in the capital account, due to the market being flush with liquidity thanks to quantitative easing in the US.

However, the situation may be completely different in the future due to the changing global economic landscape, says Bank Indonesia (BI) Deputy Governor Perry Warjiyo.

 “The period of easy money is over,” he said on Monday in a keynote speech at a seminar. “This means that we need to have a better capacity to attract more long-term funds, such as FDI, to finance the shortfall [in the current account].”

Indonesia’s balance of payments — the measurement of an economy’s financial healthiness that takes into account all monetary transactions in and out of the country, which comprises the current account and the capital account — recorded a US$2.6 billion deficit in the third quarter, mainly because of the declining contribution of the capital account.

In the third quarter, the capital account posted only a $4.9 billion surplus, lower than the $8.2 billion recorded a quarter earlier.

Economists say that Indonesia will need a healthy capital account to support the high deficit in the current account, the shortfall of which stood at $8.4 billion in the third quarter, or equivalent to 3.8 percent of gross domestic product (GDP).

Despite its growing importance in the economy, FDI has been easing as investors hold back investing in the country due to regulatory uncertainties ahead of the 2014 election. In the third quarter, year-on-year FDI growth slowed to a three-year low of 18.4 percent to reach Rp 56.6 trillion ($4.8 billion).

In an effort to spur FDI growth, Vice President Boediono announced a policy to streamline processing permits for new businesses and electricity access. Coordinating Economic Minister Hatta Rajasa also announced a plan to revise the negative investments list (DNI) to attract more foreign investment in certain sectors, such as airport and seaport management and pharmaceuticals.

 “We need to implement breakthroughs to improve our investment climate. That’s the key to attracting FDI,” said Perry.

Analysts agree with BI, arguing that more FDI should be seen as a credible source of financing ahead of more turbulence in the financial market next year, which might limit the amount of portfolio inflow.

 “The equity market will experience pressure next year,” said Maynard Arif, the head of research at DBS Vickers Securities Indonesia.

 “Uncertainty over the tapering of the US quantitative easing will still affect short-term sentiment in the market. In addition, our macroeconomy will face more challenges, compared to in the past few years,” he explained.

Portfolio investors have rushed to exit Indonesia’s equity market after the US Federal Reserve first hinted of pulling back its quantitative easing in May.

The Jakarta Composite Index (JCI), which on Monday rose 0.4 percent to close at 4,334.81, fell 16 percent after it touched a historic high of 5,214.98 on May 20. (The Jakarta Post)