By Rieka Rahadiana, Reuters
Indonesia's recent policy moves bode ill for Southeast Asia's largest economy, ratings agency Standard and Poor's has warned, forgoing an expected upgrade in its credit rating to investment grade even as it lauded strong economic fundamentals.
Although S&P retained a positive outlook on its Indonesia rating and praised record first-quarter foreign direct investment figures released earlier in the day, it singled out policies in the key mining sector and failure to approve an immediate fuel price hike as negative developments.
"We feel that the policy environment has deteriorated because of this raft of recent measures or proposed measures, and the government's inability to push through what is really not subsidy reform, it is really a price adjustment and they couldn't even do that," said S&P analyst Agost Bernard.
Indonesia's foreign direct investment surged 30.3 percent year-on-year to 51.5 trillion rupiah ($5.61 billion) in the January to March period, exceeding the 25.2 percent rate posted in the last quarter of 2011, boosted by mining investment and an investment-grade credit rating in January from Moody's Investors Service.
But analysts cautioned that new mining rules and weak infrastructure could deter future investors.
Mining, which accounted for about 12 percent of Indonesia's GDP last year and is creating new millionaires in a commodity-led economic boom, took in nearly one-fifth of FDI in the first quarter as existing investors pledged another $1.1 billion.
The increase defied recent Indonesian mining regulations and proposals aimed at boosting government revenue, including a law requiring foreign miners to divest at least half their assets after 10 years, which analysts say may scare off new investors.
"The decisions from the government that have been taken in recent months, that's going to impact some activity probably 12 months down the road ... I think it might slow investment," said Dominic Schnider, executive director of wealth management research at UBS.
New investment is key to achieving the country's ambitious target of becoming a top 10 global economy by 2025 by selling more finished products rather than simply exporting raw materials, while improving its creaky infrastructure to achieve the president's 7 percent annual economic growth target.
Indonesia's economy has benefited since it was awarded investment grade status by Fitch in December and by Moody's in January. Global bonds it issued last week drew strong demand, with yields lower than those of some of its emerging peers and troubled euro zone nations.
But S&P is for now remaining aloof from the upgrades.
Indonesia investment chief Gita Wirjawan said the stronger pace of foreign investment so far this year, in a quarter that is usually slow, signals that investment will help to drive robust economic growth for the year.
"Although the economies are slowing in many countries such as the United States and the euro zone, investment activity is still growing well. This shows that policies taken so far have been on the right track and the investment climate in Indonesia is getting more conducive," said Wirjawan, a former JPMorgan banker who was also promoted to trade minister last year after helping to attract record levels of investment.
Other sectors drawing investment this year included transportation, storage, telecommunications, food, plantations, machinery and autos, from firms including South Korean steelmaker POSCO and Hankook Tire.
South Korea's Honam Petrochemical plans a petrochemical plant worth $4 billion to $5 billion in west Java, if it gets government approval for the land, the board said.
The government is targeting 206.8 trillion rupiah in foreign direct investment this year, which would be an 18 percent rise on last year's record 175.3 trillion rupiah. Global investors are betting on a booming consumer sector and growing demand for resources from the world's top exporter of thermal coal and tin.
Indonesia expects investment to make up for slowing exports this year caused by weaker demand from China and European nations. The G20 economy last month revised down its 2012 growth target to 6.5 percent from 6.7 percent, while a Reuters quarterly poll in April gave a lower estimate at 6.1 percent.
The finance ministry has said it should take advantage of the country's investment status to attract more foreign investment. It is relying on private investors to finance two-thirds of its nearly $200 billion infrastructure needs until 2014.
"Improvement and realization of infrastructure projects could attract more investment," said Andry Asmoro, an economist at Bank Mandiri in Jakarta. ALB
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