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View all search resultsAnalysis: Investment inflows hide deeper vulnerabilities
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Investment and Downstream Minister Rosan Roeslani, who is also CEO of state asset fund Danantara, addresses a press conference on Dec. 17, 2025, at the Presidential Palace Complex in Central Jakarta. (Antara/Cahya Sari)
I
ndonesia's investment figures are improving, with investment realization exceeding Rp 1,000 trillion (US$57 billion) and portfolio inflows rebounding strongly in the first half of 2026. But the recovery has yet to dispel investor concerns. Policy uncertainty, governance issues and continued pressure on the rupiah suggest that confidence in Indonesia's long-term investment climate remains fragile.
Investment Minister Rosan Roeslani recently announced that investment realization reached Rp 1,010.6 trillion (US$57 billion) in the first half of 2026, up 7.2 percent year-on-year. The increase was driven almost equally by foreign and domestic investors. Downstream industries remained the largest investment destination, accounting for around 30 percent of total investment. However, the focus has shifted from nickel to bauxite processing ahead of the government's planned ban on raw bauxite exports in 2027.
The composition of investment reveals deeper structural weaknesses. Foreign direct investment remains concentrated in extractive and commodity-based industries, while manufacturing continues to lag behind regional peers. Manufacturing contributes only around 19 percent of Indonesia's GDP, compared with more than 20 percent in Malaysia, Thailand and Vietnam.
Indonesia's declining competitiveness reinforces this concern. The country's ranking in the IMD World Competitiveness Ranking fell from 27th in 2024 to 48th in 2026, reflecting weaker productivity, business efficiency, management quality and innovation. Investment efficiency also remains low. Indonesia's Incremental Capital Output Ratio (ICOR) stood at 6.24 in 2025, indicating that increasingly larger amounts of capital are required to generate economic growth. At the same time, the Manufacturing Purchasing Managers' Index (PMI) fell to 46.9 in June 2026, remaining in contraction territory for a second consecutive month. Together, these indicators suggest that stronger investment figures have yet to translate into stronger productive capacity.
The recovery has also been reflected in financial markets. Bank Indonesia Governor Perry Warjiyo reported that portfolio investment rebounded sharply to $8.5 billion in the first half of 2026, from just $0.7 billion in the same period last year. Much of the inflow went into government bonds and Bank Indonesia Rupiah Securities (SRBI), a rupiah-denominated instrument introduced in 2024 to absorb excess liquidity and support exchange-rate stability.
While the rebound has strengthened foreign exchange inflows, it largely reflects demand for high-yield financial instruments rather than stronger confidence in Indonesia's fiscal position or external fundamentals. The composition of these inflows illustrates the point. Outstanding SRBI has reached Rp 1,072 trillion, while foreign ownership rose from 15 percent to 27 percent between December 2025 and June 2026.
Reliance on SRBI comes with trade-offs. High-yield central bank securities may reduce demand for government bonds while discouraging banks from extending productive loans to businesses. In turn, higher government borrowing costs and weaker private-sector credit growth could constrain future investment and economic expansion.
