JAKARTA (TheInsiderStories) – The Government expects capital market activity, including initial public offerings and bond issuance, to reach Rp855 trillion (US$64.3 billion) in 2018. While, foreign direct investment is projected to realize Rp799 trillion (US$60.1 billion), according to authorities.

Finance Minister Sri Mulyani has suggested next year’s investment from capital markets, including initial public offerings, limited public offerings, corporate bonds and rights issues, could grow by 10 to 15 percent, to US$ 64.3 billion. However, as of the end of August 2017, investments from such capital market activities only reached Rp162 trillion (12.18 billion).

In the 2018 state budget draft, the government aims to issue  Rp668.6 trillion (US$50.2 billion) in government bonds (gross). Of this figure, about 20 to 25 percent will be issued in global currencies, including US dollar, Japanese yen and Euros.

Meanwhile, foreign direct investment (FDI) as well as domestic direct investment (DDI) could reach US$60.1 billion, or up by 17 percent from this year’s targeted US$45 billion. As of 1H the realization only reached US$25.3 billion. The Government stresses that it will continues to maintain a positive investment climate, after being awarded an ‘investment grade’ rating from S&P.

In addition, investment from banks, in the form of loan disbursements, is also expected to rebound into double digit growth, to Rp483 trillion (US$36.3 billion), from this year’s target of Rp370 trillion (US$27.8 billion), with investment credit expected to grow by 13 to 15 percent. As of end-July, bank loans only grew 7.9 percent, while investment credit grew 6.22 percent.

David Sumual, an economist with private lender Bank Central Asia, sees foreign capital inflow as still fueling emerging markets, including that of Indonesia, following moderate outlook for any Fed rate increase. Against this, a mixed message from the Euro Central Bank, indicating they will ease off on quantitative easing (government bonds, mortgage debt securities purchases); this will likely exert a lighter effect than any US decision.

In the real sector, Sumual believes realization of FDI and DDI will be higher than this year’s, as many existing infrastructure projects are in progress. For example, the Chinese investment ration (commitment vs. realization) currently stands above 10 percent.

“For the banking sector I think the government set its target a little bit too high. Data from Deposit Insurance Corporation (LPS) in August reported said deposits from accounts above Rp5 billion grew by 16 percent, compared to accounts below Rp5 billion, that grew 8 percent. This clearly shows people are still reluctant to spend their money into consumption or to invest it,” he suggested.

Eric Sugandi, an economist from SKHA Institute for Global Competitiveness, sees next year’s investment through FDI and DDI as growing moderately, at 13 percent, because of mixed factors that could affect investor decisions. In the end, the decision is the investors’ hands.

Meanwhile, for investment credit, he expects it will grow by around 12 percent. “Investment credit is usually channeled for capital goods spending typically with long durability. If the government and state-owned enterprises spending on infrastructure accelerates, it will trigger investment credit growth; this in turn will follow investment growth,” he surmised.

Developing Underperform Capital Markets

Based on the latest CEIC data, Indonesia’s gross savings rate stood at around 34.6 percent of its GDP, as of June 2017. This number also includes savings of private Indonesian companies, the government and workers. Meanwhile, Indonesia capital markets currently stand at only around 41 percent of GDP, below the peer median of 74 percent, according to the IMF.

Still, it is relevant to bear in mind that the potential of an unbanked young generation (or Millennials) is still abundant. Financial literacy is the key to seize this market. Currently 54 million working Indonesian Millennials (defined as those above 15 and under 35) earn a monthly salary of roughly Rp2.1 million (US$157.5); if they invested, the nation could actually obtain an additional Rp403 trillion (US$30.3 billion) of fresh funds annually. To illustrate just how big this potential market is, it equals 43 percent of the US$90 billion in funds required annually by the government.

To develop financial markets more deeply, such instruments as term deposits or normal saving accounts are simply not sufficient. Other options, including real estate investment trusts (REITS), mutual funds and exchange-traded funds (ETFs) are more exotic and required.

1US$ = Rp13.300

Writing by Yosi Winosa, Email : linda.silaen@theinsiderstories.com