From Financial TImes

Indonesia struggles to attract investment

By Shawn Donnan in Jakarta

Published: August 14 2006 09:17 | Last updated: August 14 2006 12:42

Indonesia is continuing to struggle to attract badly needed investment, new figures showed on Monday, in a sign the business-friendly promises of President Susilo Bambang Yudhoyono may be failing to woo sceptical investors.

The gross domestic product of south-east Asia’s largest economy grew by a better than expected 5.2 per cent in the second-quarter of this year, accelerating from the previous quarter for the first time since Mr Yudhoyono took office in October 2004.

But the GDP figures released on Monday indicated the faster growth – from a revised 4.7 per cent in the first quarter – was driven largely by higher prices for commodities such as palm oil and a 31 per cent increase in government spending.

Investment was the only component of GDP to decline, according to Indonesia’s Central Statistics Agency. As measured by fixed capital formation, it fell almost 1 per cent from the year before, highlighting the country’s struggle to compete for investment with regional rivals like China, India and Vietnam.

Mr Yudhoyono, a retired Suharto-era general and Indonesia’s first directly elected president, took office promising reinvigorated reforms and faster growth. He predicted that his five-year term would see GDP grow an average 6.6 per cent, the level economists say is needed for Indonesia to address high unemployment and absorb the thousands of new job-seekers who enter the potential workforce each year.

But Mr Yudhoyono’s government has struggled to implement promised reforms, with key members of his administration complaining they are stymied by the country’s parliament and its bloated bureaucracy.

Revisions to tax and labour laws promised this year have stalled in the country’s parliament while a $150bn infrastructure investment programme unveiled with great fanfare in January 2005 has struggled to get off the ground.

Sailesh Jha, a Singapore-based economist for Credit Suisse, said a decision by Mr Yudhoyono to more than double government-set fuel prices last year and slash a soaring fuel subsidies bill had contributed to the slow return of investors.

The high inflation and interest rates that resulted hurt consumer sentiment, a vital issue for an economy where two-thirds of GDP comes from household consumption. Mr Jha said that had caused investors to pause, as did the increase in production costs associated with the fuel price rise, which was a blow to Indonesia’s struggling competitiveness.

Before the fuel price increase, Indonesia’s average logistics costs stood at about 12 per cent of sales, compared with 5-6 per cent in China and 2-3 per cent in Singapore, Mr Jha said.

Non-oil and gas exports made up more than 30 per cent of GDP in the second quarter and were up 11.3 per cent year-on-year while government spending (8.7 per cent of GDP) grew 31.4 per cent. Household consumption increased 3 per cent year on year, making up 64.5 per cent of GDP.

Additional reporting by Taufan Hidayat

Copyright The Financial Times Limited 2006
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