Indonesia is flush with natural resources and boasts a large healthy domestic economy.
The country has been a darling with investors and companies looking for growth opportunities.
But with regulatory challenges cropping up, such as proposed higher caps on foreign ownership in local banks, economists are concerned that politics may cloud the big picture for Southeast Asia’s fastest growing economy.
With its recent fuel subsidy reform thwarted by public protest, analysts said Indonesia could see spending cuts in much-needed areas like infrastructure development.
This may dent Indonesia’s reputation as a business destination, and could make it less attractive to investors.
Song Seng Wun, regional economist, Singapore Research, CIMB, said: “We have seen some flip flop in policies especially with regard to the mining sector and that has caused some anxiety among investors – that’s partially the cause of some of the volatility in the balance of payments.”
Indonesia has seen portfolio capital outflows in the last quarter of 2011, but analysts said there is very little risk of capital flowing out on the scale seen during the 1997 Asian Financial Crisis.
Vishnu Varathan, market economist, Mizuho Corporate Bank, said: “They have done a lot of reforms along the way to ensure that short term capital infows are not excessive. And one other mitigating factor is that FDI inflows have increased dramatically, which means the balance between portfolio and FDI inflows is now better.”
Despite the regulatory challenges such as a 25 per cent mining tax, analysts said sectors that benefit from Indonesia’s domestic consumption will continue to do well.
Herald van der Linde, head of Equity Research for Asia Pacific, HSBC, said: “I think the sectors that are more interesting are the ones which are not impacted by these regulations, (those that are) relatively defensive, and (those that) may benefit from the delay in cut in fuel subsidy, because they have been able to increase their prices anyway.”
“So I would think about domestic-oriented industrials, cement, food producers, (and) food retailers,” he added.
Indonesia’s economy is expected to outperform regional peers, growing at just below 6 per cent this year.