ASEAN KEY DESTINATIONS
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Bank Indonesia is thinks that foreign direct investment this year will surge 42 percent to $14.5 billion on the back of growing optimism about Indonesia, but it expects capital market inflows to fall as advanced economies recover.
"The confidence about our economy has built up and we are glad to see this trend," Budi Mulya, a deputy governor at the central bank, told the Jakarta Globe on the sidelines of a high-level conference on Asian inflows in Nusa Dua, Bali.
But this year, FDI growth will likely outpace capital market inflows as the US economy is returning to growth, meaning the money will fly back to safe-haven assets from riskier bets in emerging markets, he said. But the Indonesian government much prefers direct investment to inflows to capital markets, which are far more liquid and easier to withdraw.
Total capital inflows to Indonesia have increased sharply over the past two years. They plunged to minus $1.8 billion in 2008 during the global financial crisis, but skyrocketed to $26.2 billion last year as investors were drawn to high-yielding assets.
The country saw $15.2 billion in stock and bond inflows in 2010, while direct investment was $9.8 billion.
However, last year's market inflows were driven up by "hot-money" in short-term speculative investments, prompting concerns that the funds could suddenly flow out of the country, hurting the financial market's stability.
Bank Indonesia has issued a number of policies to encourage longer-term investments, including lengthening maturities for its debt papers and introducing minimum holding periods, driving investors out of a one-month BI note that had been popular for its high yields and liquidity.
Also attending the conference was Stefan Koerberle, the World Bank's country director for Indonesia. To attract even more foreign direct investment, he said, the government must address infrastructure bottlenecks while trimming regulations and raising transparency, key hurdles to investment. He added that transportation projects were especially important.
Jeffrey Frankel, Harpel professor of capital formation and growth from Harvard University, said the lack of infrastructure left Indonesia vulnerable to missing out on investment from abroad. /540m_adb_loan_for_vietnam_rapid_transit
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