Will New Infrastructure Projects Give Indonesia’s Economy the Boost It Needs?
Jakarta. More bright spots in infrastructure are starting to appear under President Joko Widodo’s government, as major projects roll out across the country. This is giving some observers hope that Indonesia’s economy is going in the right direction even when growth will likely remain sluggish for at least the rest of the year.
Based on the Jakarta Globe’s review of news reports, inaugurations of major infrastructure, energy and mineral-related projects have intensified since May. The latest was Joko’s sendoff of energy-related projects worth billions of dollars in Banggai, Central Sulawesi. The fact that projects are being rolled out and money is finally being spent to stimulate the economy should lift investors’ confidence.
“There is a new hope,” said Sjambiri Lioe, finance director at Tiga Pilar Sejahtera Food, which engages in food manufacturing, palm oil plantation and rice milling. He thinks the private sector expects the multiplier effect from the various infrastructure projects recently inaugurated to start affecting the economy sometime in the next quarter.
“Infrastructure is easy to monitor,” Sjambiri added. “Once the work has begun, there would be a slew of euphoric bow-cutting ceremonies. We could probably start seeing the results in the beginning of the fourth quarter.”
The latest projects inaugurated by Joko Central Sulawesi were huge. Some of the major ones include a $1.2 billion Central Processing Plant operated by Joint Operating Body Pertamina Medco Tomori Sulawesi and a new $830 million ammonia plant of chemical manufacturer Panca Amara Utama in Banggai. The ammonia factory is considered as one of the largest ammonia plant developments in the country over the last decade.
The president, accompanied by first lady Iriana and top government officials, also witnessed the first cargo shipping of liquefied natural gas from a $2.8 billion Donggi-Senoro plant operated by Donggi-Senoro LNG (DSLNG).
This followed some major infrastructure projects inaugurated by Joko previously, including some fractions of Trans-Java — a 1,000 kilometer proposed toll road across Java from Merak in Banten, West Java, to Banyuwangi in East Java – and the Trans-Sumatran Highway, a 2,508.5 km north-south road in Sumatra, from Banda Aceh to Bandar Lampung.
He also witnessed groundbreaking of parts of his administration’s ambition to develop 35,000 megawatts worth of new power plants in the country within the next five years across the nation.
An Rp 856 billion project to develop the 433-km Holtekamp Bridge in Papua was also witnessed by Joko, among many other projects.
Still, company executives in Indonesia realize the inauguration of all these projects will not just make the economy grow.
“Infrastructure development doesn’t happen in one day. It’s a continuous process. Any news of an infrastructure project starting or completing will undoubtedly bring positive outlook for the company, but the impact won’t be seen as soon as the second term,” said Rudy Suhendra, corporate secretary of Eagle High Plantations, previously known as BW Plantations, an Indonesian oil palm plantation company.
“For [Eagle High Plantations], infrastructure is definitely important in order to deliver goods. The government has a big picture right now, but we’re still waiting on the realization. The positive side is that the government is showing support for business. However, it will take one to two years to see if the projects are moving the economy.”
Obstacles to economic growth due to external factors remain strong, especially amid the stronger headwinds that hit China, the world’s second biggest economy. Reuters reported that recent data on manufacturing conditions in China showed deterioration to their worst levels in two years in July.
The news has triggered a fresh slump in global commodity prices and clouded hopes for a convincing global economic recovery in the second half of the year, the report continued. Indonesian producers will unlikely escape the deteriorating impacts as they have been heavily reliant on Chinese demand.
A polling done by Reuters of 22 analysts showed a median estimate that Indonesia’s economy may grow only 4.61 percent in the second quarter of this year, a slower pace compared to a 4.71 percent growth posted in the first quarter, which was the slowest pace in four years.
Slower growth has found its way to errode corporate earnings.
“High frequency indicators — including loan growth, vehicle sales, government budget disbursement and trade — suggest weak activity on almost all fronts,” Chua Hak Bin, an economist with Bank of America Merrill Lynch, told Reuters.
The median forecast of 22 analysts in the Reuters poll is for growth at 4.61 percent, even weaker than the 4.71 percent growth posted in January-March.
Net income of companies in the automotive sector, like Astra International, lenders like Bank Negara Indonesia, but also consumer goods giant Indofood Sukses Makmur, have all disappointed.
The gloomy outlook for the second quarter will likely to lead to a sluggish full-year growth, analysts said.
The same Reuters poll showed the median estimate for full-year growth was at 4.9 percent, well below the 5.3 percent in the last poll in April.
“How bad will 2015 GDP growth be? If GDP growth were to have remained at 4.7 percent in the second quarter of 2015, we expect full-year GDP growth to be nothing higher than 4.9 percent. This is already taking into account acceleration in fiscal spending towards the year-end,” said Gundy Cahyadi, an economist from DBS Bank in Singapore.
Yuda Permana, in charge of business development in international and tourism affairs at the Indonesia Young Entrepreneur Association (HIPMI), estimated economic growth could be lifted by 0.3 percent this year and 1 percent in 2016, thanks to the infrastructure investments.
“Amid the slower global economic growth, these projects could help Indonesia’s growth to hover at around 5 percent,” said Yuda, a former economist at the US Embassy.
While the growth picture isn’t that rosy, surprisingly, foreign direct investment accelerated in the second quarter of this year, with cash flowing in for the transport, telecommunications and mining sectors in particular.
FDI, excluding the banking and oil and gas sectors, rose 18 percent to Rp 92.2 trillion ($6.8 billion) compared to the same period a year ago, data from the Investment Coordinating Agency (KPM) showed. It was faster than the 14 percent rise recorded for the previous three months.
Malaysia contributed the most, investing $2.3 billion, followed by Singapore ($1.1 billion), Japan ($400 million), the United States ($300 million) and the British Virgin Islands ($200 million).
“I have seen quite good efforts. Jokowi has called for bigger investment from China and Japan. That’s already correct, we need more investment from those countries. We need to make them happy to stay [and invest] in the country,” said Yuda of Hipmi, who is also a former executive vice president at state-owned infrastructure guarantee fund Penjaminan Infrastruktur Indonesia.
Double digit growth?
Joko himself is full of optimism on Indonesia’s economy, although some economists insists that his growth targets are too ambitious.
In a recent statement in front of a forum joined by top Singaporean business executives, he said Indonesia’s $900 billion economy could double in size in ten years as his administration works to speed up reforms to spur growth and move up the global value chain.
“We have gone through an economic cycle. The era of a commodities economy has come to an end,” Joko said in Singapore on Tuesday as quoted by the official Twitter account of the Ministry of Foreign Affairs (@Portal_Kemlu_RI).
“Indonesia can no longer delay fundamental reform of its economy. There is no gain without pain.”
He delivered his keynote speech in front of over 200 top executives during the Singapore-Indonesia Business Forum as part of his official visit to Singapore.
Taking into account the compounding effect, Indonesia’s economy will only double if it grows by at least 7.2 percent every year in the next ten year, starting from next year.
The last time Indonesia grew over 7 percent was in 1996 under the regime of President Suharto, when the authoritarian president had no problems in pushing through massive infrastructure projects and there was no regional autonomy to deal with.
Two economists greatly doubt about this ambitious growth target.
“The current global economy is still challenging because of the deleveraging of assets in developed countries and China’s structural reform to a consumption-driven economy, so Indonesia’s growth will highly depend on investment,” Aldian Taloputra, an economist at Mandiri Sekuritas, told GlobeAsia on Wednesday.
“Doubling in ten years means 7 percent [gross domestic product] growth per annum. This year, the economy is on track to grow 4.8 percent,” Sebastian Tobing, head of research at Trimegah Securities, said in an e-mail to GlobeAsia on Wednesday.
Joko’s upbeat ten-year growth projection also came as the nation faced its weakest growth rate in five years.
The economy moved at an annualized rate of 4.7 percent during the first quarter of the year in which investments from the private sector contributed to one-third of the economy.
Earlier this month, the World Bank slashed growth forecast to 4.7 percent this year from the initial projection of 5.2 percent made late last year, despite the government’s target a 5.7 percent growth by the end of the year.
GlobeAsia, with additional reporting from Reuters
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