June 11, 2014 / 9:00 PM / 4 years ago

In Indonesia, foreign investors wait to see who will be president

JAKARTA/TAIPEI, June 12 (Reuters) - Billions of dollars in foreign investment hinge on next month’s Indonesian presidential election, with at least one major company holding back after a former special forces general made a surprisingly strong entry into the fray.

A tight July 9 election that will decide who runs Southeast Asia’s largest economy for the next five years pits popular Jakarta governor Joko “Jokowi” Widodo against the ex-general, Prabowo Subianto.

Both favour a more nationalist agenda, underpinned by popular perceptions that the economy has for too long depended on selling off its vast natural resources cheaply to foreign buyers and that past governments have done little to nurture, and protect, local firms.

But Prabowo is seen as more fiercely nationalistic, while Jokowi is seen as a hands-on, more capable administrator. And despite Indonesia’s large pool of labour, relatively low costs and a growing middle class, many potential investors say they will wait until the election is decided.

At the top of the list of foreigners with big money to spend is Taiwan’s Foxconn Technology Group, the world’s largest electronics contract manufacturer and one of the major suppliers to Apple Inc.

Its chairman, Terry Gou, made no secret of the fact during a visit to Jakarta in February that he liked dealing with Jokowi in discussions over whether to bring his company’s next giant investment to the Indonesian capital.

At the time, Jokowi was the clear front-runner in the election. He still is, but Prabowo has since been backed by the powerful Golkar party and opinion polls show the former general is catching up. A large percentage of voters are undecided, one survey has said.

Foreign direct investment in Indonesia was 270.4 trillion rupiah ($23 billion) in 2013, up about 22 percent from the previous year. But growth slowed sharply to 9.8 percent in the first quarter this year, the government has said.

Foxconn, listed as Hon Hai Precision Industry Co Ltd in Taiwan, is waiting for the new government to take office in October before deciding whether to go ahead with a $1 billion manufacturing project in Indonesia, a company source had said.

Key sticking points appear to be Foxconn’s request for free land in Jakarta and Indonesia’s convoluted bureaucracy.

“Regarding the incentives Foxconn has requested, there’s no one they can talk to whose decisions will count,” said a source with direct knowledge of Foxconn’s situation.

“Indonesia is a huge market for Foxconn. Foxconn truly hopes there will be a clear direction in their policies after the election.”


The investor community tends to favour Jokowi, a former furniture businessman, compared to Prabowo, according to interviews with senior executives and capital market players.

Indonesian stocks and currency were hit following Golkar’s unexpected announcement on the afternoon of May 19 that it would back Prabowo.

The rupiah has weakened further, trading around 11,800 to the dollar currently against roughly 11,400 before the announcement. Jakarta’s main stock index remains more than one percent below the pre-announcement level.

“Generally, business people feel that Jokowi is more business-friendly,” said Kenichi Tomiyoshi, President Director of the Japan External Trade Organization in Jakarta.

Jokowi has earned a reputation of being a hands-on leader and a problem solver, analysts say.

“A lot of problems that businesses face in Indonesia are operational issues such as land acquisition. Based on his track record, he is likely to be more closely or directly involved in trying to solve these issues,” said Anton Alifandi, an analyst at IHS.

“If Jokowi wins, businesses will look at what he does in the first six months or a year. If they see some results and that he can deliver what he promised, you’ll see the foreign investment coming in.”

The attraction of Indonesia to investors from countries like Japan, South Korea and the United States lies with its population of 240 million, the world’s fourth-biggest, as well as its expanding middle class.

Many companies are also keen to diversify their operations away from Thailand, which has been rocked by political unrest. In Vietnam, another regional manufacturing hub, anti-China riots broke out last month over disputed sovereignty in the South China Sea.

Japanese firms are keenly eyeing the automotive, food products and financial services sectors in Indonesia, Tomiyoshi said. “Japanese companies face limited growth in their domestic market so they have to look overseas, particularly Indonesia.”

Chief Economic Minister Chairul Tanjung has invited Samsung Electronics to invest in a mobile phone factory in Indonesia and the South Korean company is considering it, said Lee Kang Hyun, vice president of PT Samsung Electronics Indonesia.


In January, the government imposed a controversial export tax and a ban on mineral ore shipments to force miners to build smelters and processing plants, spurring investor concerns that it signals a more protectionist Indonesia.

Jokowi and Prabowo are both unlikely to lift the mineral ore export ban, party officials said.

Both presidential candidates are also likely to take a more protectionist approach towards the banking sector. Jokowi has proposed restricting the sale of national banks to foreign investors, while Prabowo will insist on “strict reciprocity” for the banking and insurance sectors.

Currently, foreign ownership of banks is capped at 40 percent. In July last year, Singapore’s DBS Group Holdings Ltd said it would not pursue a $7.2 billion takeover of Indonesia’s PT Bank Danamon after the deal was stuck in limbo for months.

U.S. companies were planning around $61 billion in new investments in Indonesia over the next 3-5 years “provided that the investment environment is conducive and welcoming”, according to a study late last year led by Ernst & Young.

But some investors believe it’s worth being in Indonesia in the long term.

While Indonesia struggles with a lag in labour productivity versus its neighbours and an uneven income distribution, these are “short-term woes that could be opportunities down the road if acted on,” said Bharat Joshi, an investment manager at Aberdeen Asset Management in Asia.

“We still like the attraction of the country’s rising wealth and favorable demographics, underpinned by low debt and increased consumerism,” Joshi said. ($1 = 11,805.00 rupiah) (Additional reporting by Fathiyah Dahrul in Jakarta; Editing by Jonathan Thatcher and Raju Gopalakrishnan)

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