The increasing dominance of foreign direct investment (FDI) in the Indonesian economy is expected to reduce incidences of sudden capital outflow in the Southeast Asian country.

 

The likelihood of the country’s credit rating raised to investment grade is also seen to further boost FDI, according to Aldian Taloputra, economist at Mandiri Investasi, the asset management unit of Bank Mandiri.

 

“The government expects total direct investment to grow by 15 percent to around USD2.7 billion in 2011. With the remaining surplus trade balance, a room for rupiah appreciation is still open. We expect the currency to strengthen to 8,450 rupiah (Rp) to one US dollar by year end 2011,” Taloputra says. The rupiah, one of Asia’s best performing currencies so far this year, has gained five percent year-to-date, touching seven-year highs of Rp8,500:USD1 recently.

           

The Indonesian economy grew solidly in the first quarter of 2011, expanding by 6.5 percent on the back of strong domestic demand. This is higher than the average GDP growth rate of 5.5 percent year-on-year in the last decade. The solid economic fundamentals and sovereign rating improvement, coupled with ample global liquidity, have triggered surge in capital inflow.

 

Since 2009, portfolio inflow dominated the foreign inflow to Indonesia, (year-to-date, about USD7.5 billion of inflow went to government bond, central bank paper), however in the last two quarters, there is a trend showing foreign direct investment strongly picking up, surpassing the portfolio level.