| JABABEKA, Indonesia
JABABEKA, Indonesia Indonesia has $75 billion of foreign direct investment (FDI) in the pipeline, showing that investment will continue to drive Southeast Asia's biggest economy in coming years, the country's investment chief said on Wednesday.
"That's why I'm optimistic," Chatib Basri told Reuters on the sidelines of an event to open a new L'Oreal (OREP.PA) cosmetics factory in an industrial estate in western Java island.
The $75 billion is investment that is likely to have been pledged but not yet spent in the country, such as the $5-$10 billion that the government says Apple Inc (AAPL.O) supplier Foxconn Technology Group 2354.TN plans to invest.
Indonesia saw FDI grow 22 percent to a record $5.90 billion in the third quarter, to take it to $17.43 billion so far this year. The strong investment has helped make up for declining exports to keep economic growth above 6 percent in 2012.
Foreign companies are moving beyond traditional investment to tap abundant natural resources and into manufacturing sectors that add more value to the economy and create jobs, Basri said. This fits a long-term government strategy to turn the G20 member into a world top 10 economy.
L'Oreal's factory, its largest in the world, follows investment in Indonesian plants by Japan's Toyota Motor Corp (7203.T), South Korean steelmaker POSCO (005490.KS) and U.S. truck maker Caterpillar (CAT.N).
"Indonesia is back on the radar screen now," Basri said, pointing to moves to tap a "consuming class" of 135 million people.
GROWING MIDDLE CLASS
Demand from this growing middle class in the world's fourth most populous nation is surging, from shampoo and disposable diapers to smartphones and airline flights. Retail sales jumped 22 percent in September from a year ago, and consumer confidence climbed further in October because of optimism over jobs.
Local firms are also investing, according to research by Deutsche Bank, which recently met 25 companies from nine industries and found all of them were expanding.
"The growth cycle is evolving. The supply side is responding as businessmen are now expanding investment ... This could be a virtuous cycle of consumption leading to investment leading to consumption," said Heriyanto Irawan, Deutsche's head of Indonesia research.
Foreign companies still face plenty of investment challenges in Indonesia, from rising wages and recent labor protests, to difficult land acquisition, corruption and policy flip-flops. Uncertainty over government policy after national elections in 2014 also remains a worry, executives say.
Government rules this year to curb raw mineral exports to drive higher value metals processing have led to pledges of billions in FDI for smelters in recent months, but a supreme court ruling has upheld a challenge to the rules, throwing the industry into confusion this week.
"With the cycle driven by investment, any policy that could affect investment could hurt the macro picture," said Irawan.
(Editing by Ron Popeski)