Contributors: Macroeconomic, Finance, and Political Economy Research Group

Introduction

Indonesia’s investment landscape experienced a significant surge in Q2 2024, reflecting growing domestic confidence and sustained foreign interest in the Indonesian market. The latest figures from the Ministry of Investment (BKPM) revealed that Indonesia attracted IDR 428.4 trillion in total investment during the quarter, reaching 26% of the ambitious target of IDR 1,650 trillion for the year. This growth is a clear indication of Indonesia's resilience and appeal as a favorable investment destination despite lingering global economic uncertainty.

Overview of Investment Growth in Q2 2024

Compared to the same period in 2023, the Q2 2024 investment volume grew by an impressive 22.5% year-over-year and also showed a 6.7% increase from Q1. This upward trend is notable as it comes amid the post-election period, a time typically marked by cautious investor sentiment. The election-driven policy environment, the smooth presidential transition, and strategic government policies contributed to Indonesia’s ability to attract substantial foreign and domestic investment, reinforcing Indonesia’s stability and future prospects as an investment hub in Southeast Asia.

Composition of Investment: Foreign and Domestic Direct Investments

Foreign Direct Investment (FDI) accounted for IDR 217.3 trillion or 50.7% of total investment, while Domestic Direct Investment (DDI) reached IDR 211.1 trillion, making up the remaining 49.3%. The near parity between FDI and DDI illustrates that both local and international stakeholders are confident in Indonesia's market potential.

- Foreign Direct Investment (FDI): FDI in Q2 saw a 16.6% increase year-over-year and a 6.3% quarterly rise, underscoring Indonesia’s global appeal, particularly as more companies look to diversify operations amid global shifts.

- Domestic Direct Investment (DDI): Domestic investment grew at an even more robust pace, up 29.1% from the previous year and 7.1% compared to Q1. This reflects a strong domestic economy and the confidence of local businesses and entrepreneurs in the long-term stability of Indonesia’s markets.

The dual contribution of FDI and DDI in this period highlights Indonesia’s resilience, both from internal economic strength and the perception of Indonesia as a valuable investment destination for foreign investors.

Sectoral Distribution of Investment: Key Beneficiaries and Strategic Growth

Investment flowed into various sectors with strong potential for growth, including manufacturing, mining, infrastructure, and tourism, among others. The government has been focused on promoting these sectors to support economic diversification and reduce reliance on traditional industries.

1. Manufacturing Sector: A significant portion of the investment was directed toward manufacturing, a sector viewed as essential for Indonesia’s economic growth and employment generation. The government’s promotion of domestic production and export-oriented industries has bolstered investor interest.

2. Mining and Natural Resources: Indonesia's rich natural resources have made mining a priority sector, especially given global demand for critical minerals. The government’s focus on responsible resource extraction has positioned Indonesia as a preferred choice for mineral investment.

3. Infrastructure and Construction: Infrastructure remains a high-priority area for investment, as Indonesia works to improve connectivity and reduce logistical costs across its archipelagic geography. Infrastructure projects not only improve business conditions but also stimulate local economies.

4. Tourism: As one of the top destinations in Asia, tourism investment is a key focus area, particularly after the pandemic’s impact on travel and hospitality. Investment in this sector signals a strategic effort to revitalize tourism through sustainable and diverse tourism offerings.

Political Stability and the Post-Election Climate: Fostering Investor Confidence

The post-election environment has proven to be conducive to investment, with a stable political transition fostering confidence among investors. Indonesia’s approach to its political transitions has been a crucial factor in ensuring economic stability, making the country an attractive environment for businesses that prioritize predictability and stability in their long-term strategies. Notably, investors are keeping a close eye on the new administration’s stance on various policies, including taxation, labor laws, and environmental regulations.

Policy Measures and Government Initiatives Driving Investment

The Indonesian government has launched several initiatives to enhance the investment climate, including tax incentives, regulatory reforms, and policies aimed at reducing bureaucratic red tape. The government’s focus on digital transformation in administrative processes has simplified compliance and facilitated the ease of doing business, a critical factor in attracting both foreign and domestic investment.

1. Tax Incentives: New policies offer tax breaks and deductions to businesses operating in priority sectors, helping to lower operational costs for new investors and promoting long-term investment.

2. Labor and Industrial Policy: Reforms in labor laws aim to create a more competitive workforce, which in turn attracts industries requiring a skilled workforce, such as manufacturing and information technology.

3. Digital Transformation: Indonesia’s commitment to digitalizing government processes has made it easier for companies to navigate regulatory requirements, improving investor confidence.

Small and Medium Enterprise (SME) Involvement: A Growing Segment

The government’s strategic focus on promoting Micro, Small, and Medium Enterprises (MSMEs) as a driver of domestic investment has been successful, especially in Q2 2024. Indonesian SMEs contribute significantly to the local economy and employment and are now increasingly part of larger supply chains. The government’s initiatives, including financial support, capacity-building programs, and market access support, have strengthened the role of SMEs in the economy, positioning them as valuable contributors to Indonesia’s investment landscape.

Risks and Challenges: Navigating Economic Uncertainty

While the Q2 2024 investment figures are encouraging, Indonesia faces challenges that could impact future growth. The global economy is still recovering from supply chain disruptions, inflation, and the pressures of rising interest rates, all of which can influence foreign investment decisions.

Moreover, the depreciating Rupiah presents a challenge by increasing the cost of imported goods and potentially driving up inflation, which can affect consumer purchasing power. Nevertheless, Indonesia’s diverse investment portfolio and strategic focus on high-growth sectors provide a cushion against potential headwinds.

Outlook and Future Projections

The investment landscape in Indonesia looks promising, as the post-election period has set a stable foundation for further growth. As the government works toward its ambitious target of IDR 1,650 trillion in total investment by the end of 2024, ongoing efforts to improve infrastructure, streamline regulations, and support key growth sectors will be crucial.

Sustaining investment momentum will require continuous collaboration between public and private sectors, as well as policies that address structural challenges in the economy. As Indonesia advances toward its vision of becoming a high-income nation by 2045, fostering a conducive investment climate will play a pivotal role in achieving sustainable and inclusive growth.

Conclusion

The impressive investment performance in Q2 2024 underscores Indonesia's potential as a resilient and attractive investment destination. The combined strength of foreign and domestic investments, a supportive political environment, and targeted government policies create a favorable outlook for Indonesia's economic growth trajectory. As Indonesia progresses towards its economic and social goals, it remains a key player in the global investment arena, poised for long-term success.

Acknowledgment: This article is based on the Indonesia Economic Outlook Q3-2024 report by the Macroeconomic, Finance, and Political Economy Research Group. Special thanks to authors Jahen F. Rezki, Ph.D., Teuku Riefky, Faradina Alifia Maizar, Muhammad Adriansyah, and Difa Fitriani for their insights and research contributions.