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Last Updated: Monday, 1 September, 2003, 10:42 GMT 11:42 UK
Investors 'desert Indonesia'
Megawati Sukarnoputri
Things are improving, Megawati says
The recent bomb attack on the Marriott Hotel in Jakarta is causing many foreign investors to rethink their commitment to Indonesia, experts say.

The country's Investment Co-ordinating Board has warned that more than a hundred foreign companies are planning to leave this year.

In addition to fear of violent attacks, foreigners have expressed concerns about the worsening investment climate in the country.

"A lot of companies that are operating in the regions are leaving, for example mining companies," Faurzi Iksan, a global market economist at Standard Chartered in Jakarta, told the BBC's World Business Report.

"The main reason [why companies are leaving Indonesia] is the legal, political and security uncertainty," he said.

But Mr Iksan pointed out that the country's weak economy and widespread poverty were also deterrents for foreign investors.

Last week, President Megawati Sukarnoputri said the country's macroeconomic situation was improving, but problems remain in the industrial sector and unemployment remains high.

Regional difficulties

On a more practical level, many companies found it difficult to operate in regions where local governments are flouting instructions given by the country's central administration, he said.

Beggar in Indonesia
Poverty remains rife in Indonesia
"A lot of local governments are imposing illegal taxes, in direct confrontation with the central government," he said.

Another concern for investors is the relatively high cost of Indonesian labour when compared with China and Vietnam.

"That's why a lot of companies are relocating to those countries," Mr Iksan said.

"In Indonesia there is an increase in labour militancy, but it is not matched by any increase in labour productivity."

The exodus from Indonesia was limited to some industries, Mr Iksan said.

"Foreign investors which are selling products to Indonesian consumers, especially in the retail business, are staying."


Indonesia's concerns about foreign investors fleeing coincided with a more optimistic outlook being expressed by regional trade ministers.

Despite the recent outbreak of Severe Acute Respiratory Syndrome (Sars) and recent terrorist bombings in the region, the ministers predicted that the investment flow into the region should recover this year.

Last year, the global economic weakness sent foreign direct investment into the region down to $1.2bn, an 18% fall compared with 2001.

The trade ministers said they were "upbeat on the outlook of foreign direct investment flows to the region in 2003 and 2004 because of a better global economic situation and stronger regional economic development".

Standard Chartered economist Faurzi Iksan
"A lot of local governments are imposing illegal taxes, in direct confrontation with the central government"

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