Indonesia is on track to receive record foreign direct investment this year: in the three months through September, FDI rose nearly 14 per cent from a year ago to $4.4bn, and the full-year figure will probably beat the official target of $18bn.

But the head of the OECD is encouraging deeper reforms. “Indonesia is open for business, but we believe it could do more to realise its full potential as host to foreign investment,” said Angel Gurría, who was in Indonesia on Monday, launching a report on Indonesia’s investment prospects.

Indonesia’s third-quarter FDI performance wasn’t just about quantity - the figures also showed a shift from commodity exports to domestic demand. The top foreign investment sector was real estate and office buildings, with 33 deals worth $800m, the country’s Investment Coordination Board said. The leading foreign investor was the UK with $1.3bn pouring into 86 projects.

That reflects the country’s huge consumer market of 237m people, as well as its macroeconomic stability. GDP growth was 4.5 per cent in 2009 and is forecast at least 6 per cent for 2010. The capital markets are among the best performing in the world, with investors encouraged by political calm, fiscal reforms and falling inflation.

HSBC Asia analyst Wellian Wiranto says that, in spite of Indonesia’s shortcomings in infrastructure and labour market flexibility, the country is already attractive:

At the margin… enough good things seem to be in the pipeline domestically to capture the growing attention of foreign investors.

It looks like we are going to see a good year for Indonesia - finally.

But Gurría encouraged the government to take additional measures to lift growth. He stressed the need to cut subsidies for fuel and electricity eating up roughly a fifth of the entire budget, or more than $15bn a year. He said the so-called “negative list” - of sectors partially closed to outside investors - should be dropped, arguing:

Indonesia’s recent growth performance has been impressive, but there is no room for complacency. The current environment offers Indonesia a unique opportunity to embark on a long period of sustained increase in living standards.

Gurría added that raising tax income and lowering subsidies would also free up billions of dollars for crumbling infrastructure and weak education and healthcare sectors. Following tragic natural disasters last week, his words are another reminder of the challenges facing Indonesia.

Source: ft.com/beyondbrics

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