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FDI inflows to Indonesia have increased significantly However, FDI as a percentage of GDP remains unchanged from 2008 and continues to underperform that in regional peers The push factors on FDI are undoubtedly positive: the expansion in the global business cycle, the weak outlook for the G3, and Chinas waning competitiveness owing to higher wage costs Regarding pull factors, growth is strong, labor costs are low and economic stability is improving. But the structural hurdles remain
Manufacturing Wholesale & retail trade Transport & Communication Financial Mining Agriculture Total FDI
1Q07 1Q08
While the central bank data show new FDI from abroad, the data complied by the BKPM (the Investment Coordinating Board) also include investment by foreign companies already operating in Indonesia. The BKPM data show total foreign (realized) FDI grew to USD 4.6bn in 1Q11, also up from USD 4.0bn on average last year (Chart 3).
the size) of domestic consumer market. Its population base is the worlds fourth largest, and the working-age population will continue to grow against dependent population (the so-called demographic dividend) over the next 15 years till 2025 (Chart 5). Working-age adults are able to earn higher incomes and have stronger capacity to spend as compared to the very old/young. Meanwhile, Indonesian consumers are largely debt free today (consumer loans to GNI ratio is less than 10%), and there should be great scope for consumer leverage to grow and maximize purchasing power. Meanwhile, China faces labor shortage and higher wages. MNCs in the labor intensive industries may increasingly seek alternative production bases in the region. Indonesia enjoys a cost advantage in this regard, as a large population base and a favorable demographic trend should allow it to continue to supply abundant and affordable labor forces in the foreseeable future. Average wages in Indonesia are only about one-third those in China and among the lowest in Asia.
Dependent population (<age 15 or >age 64) / Working age population (age 15-64)
ID CN IN
to 20.5% in 2010 and 22.3% in 2009. And it remains unknown to what extent the budget has been spent in the infrastructure areas, given the fact that the subsidy expenditures on fuel and food have been lifted significantly early this year in order to stabilize consumer prices. Aside from public investment, Indonesia is also encouraging the private sector to participate in infrastructure construction. The government has been working with international organizations in recent years to offer financial incentives for private investors engagement in PPP (public-private partnership) projects, such as establishing the Indonesia Infrastructure Financing Facilities and Indonesia Infrastructure Guarantee Fund. Meanwhile, the BKPM has been appointed as the front office to offer PPP, and five priority projects totalling USD 4.4bn have been laid out for 2011. Barriers continue to challenge the realization of PPP the awkward and clumsy land acquisition process, is but one example. A reform-minded land acquisition bill was submitted to the parliament in end-2010 but is still pending approval. Implementation of this and other reforms remain key to the outlook for further FDI inflow.
Notes: All data from CEIC, Bloomberg, the United Nations and DBS Research (forecasts and data transformations).
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