11/01/2018 – Country Focus / Indonesia / Asia
Bridging the Gap
It has been 20 years since the Asian Financial Crisis left the Indonesian economy in tatters, but the two decades of rapid growth that followed have set the diverse island nation on a course to become Asia’s next US$1 trillion economy. Gemma Kent reports on the key sectors that will help fuel Indonesia’s continued economic growth, as well as the infrastructural shortfalls that could potentially derail the country’s future development.
There is no denying that Indonesia has achieved monumental progress since 1998, when it was gripped by a lethal concoction of economic, social and political crises that saw the meltdown of the rupiah and the end of Suharto’s three-decade-long presidency following two days of deadly civil unrest. The Indonesia of today is a member of the G20, an emerging middle-income country with the largest economy in South East Asia and a president whose election, in 2014, marked a sea change in Indonesian politics. As a former furniture-maker and entrepreneur, Joko Widodo – known as Jokowi – is the country’s first president to come to power from outside the political elite, having won support with his promises to bring prosperity to the people and improve their daily lives.
Now more than halfway through his term, Jokowi has presided over an economy that recouped an investment-grade sovereign debt rating, launched a tax amnesty that is said to have uncovered US$370bn in previously undeclared assets, and redistributed funds from fuel subsidies toward infrastructure, healthcare and education. The President still has his work cut out for him, however, with a fiscal shortfall threatening the state budget, lower-than-expected economic growth and a massive infrastructure deficit that leaves Indonesia lagging behind other emerging markets. Indeed, the World Bank estimates another US$500bn in infrastructure spending is required over the next five years – money that Jokowi needs to find if he is to realise his presidential ambitions.
Tapping into resources
Traditionally, Indonesia’s economic growth has been fuelled by commodities – exports of raw commodities, in particular – which it possesses in wide variety and abundance. With a production volume of 419 million tons in 2016, Indonesia is one of the world’s largest producers and exporters of coal, and the leading exporter in terms of thermal coal. Some 70–80 per cent of the nation’s coal production is exported overseas – mainly to energy-hungry China, India, Japan and South Korea – but domestic sales have been increasing rapidly in recent years on account of the government’s ambitious energy programme, under which a number of new coal-fired power plants have been completed and others remain under construction, including two plants in South Kalimantan being built by Japanese-based Itochu Corp.
Meanwhile, faced with prolonged low prices that lessened the export market’s appeal, some major Indonesian mining firms have opted for forward integration into the energy sector. Adaro Energy has a portfolio of 2,260MW spread across three coal-fired power plants in Indonesia, and is now looking to build projects elsewhere in South East Asia. The scales are likely to continue tipping in favour of domestic coal sales, in line with the Ministry of Energy and Mineral Resources’ aim for coal to contribute 30 per cent of Indonesia’s energy mix by 2025, compared with 24 per cent in 2011.
Another readily exported commodity seeing increased domestic demand is palm oil, of which Indonesia is the world’s largest producer. It produced 32 million tons in 2016 and is targeting 40 million tons by 2020. An emerging middle class, combined with government support for biodiesel, is driving domestic demand. Indeed, the Indonesian Biofuel Producers Association (Aprobi) has predicted that domestic use of biodiesel could reach six million kilolitres in 2017 – about a fifth of total anticipated diesel fuel consumption – following the government’s decision to impose a 20 per cent biodiesel blending policy to non-subsidised diesel fuel.
Getting gas right
Like any nation whose economic boom was driven by commodities, declining prices and a continued slump in demand mean that Indonesia is now seeing more moderate GDP growth (five per cent in 2016). And while crude oil has been the biggest casualty of the price crash, a severe lack of investment and exploration has put Indonesia’s oil sector on a downward trend that actually started back in the early 1990s. The government is tackling this falling output – currently at around 800,000 bpd, about half of the country’s daily consumption – with a new US$200bn investment plan that will allow foreign energy firms to bid for 14 untapped oil and gas blocks, with incentives such as tax-free imports of technology and equipment. In addition, state energy firm Pertamina is spending billions of dollars to enhance production and refining capacity, with the country’s crude output expected to top one million bpd by 2019.
Nevertheless, the government seeks to lower Indonesia’s dependency on oil and has set a target for 2025 to derive 23 per cent of its energy from the fossil fuel – a significant reduction from the 2011 proportion of 50 per cent, while natural gas will continue to provide 20 per cent of the country’s energy. Indonesia is currently the world’s fourth-largest exporter of LNG, but Pertamina recently admitted that declining output at maturing domestic gas fields, coupled with soaring demand from a burgeoning population and industrial base, may result in the island nation becoming a net importer of LNG by 2020.
Initiating new production resources is problematic, on account of the fiscal terms Indonesia offers for its exploration and production contracts, leading a number of oil majors to abandon or postpone development projects in the country. Nonetheless, brighter news comes from BP’s Tangguh LNG project, where US$8bn is being invested to develop a third train that will boost capacity by 50 per cent to 11.4 million tonnes when it starts operations in 2020, while the Eni-operated Jangkrik gas field has reported a higher-than-expected output of 600 million scf per day – 150 million scf on top of what it was designed to produce.
With the third-largest reserves in the Asia-Pacific region, Indonesia accounts for 1.5 per cent of total global gas reserves, according to the BP Statistical Review. Yet domestic consumption is complicated by geography: the remote eastern areas of the country produce plenty of gas while the gas-deficient west represents nearly 75 per cent of demand – a situation exacerbated by a lack of distribution infrastructure. Earlier this year, the Director General of Oil & Gas at Indonesia’s Energy and Mineral Resources Ministry said the government needs at least US$48bn from 2016 to 2030 to build a gas grid comprising smaller-scale liquefaction facilities across the east and mini LNG terminals connected directly to gas-fired power plants in the west.
Indeed, despite Jokowi’s efforts so far, Indonesia’s inadequate infrastructure remains a sticking point, fostering inefficiency, driving logistics costs and crushing competitiveness. The country’s deteriorating roads, congested ports, and underdeveloped inter- and intra-island transport systems not only put inflationary pressures on domestically produced goods, but also seriously diminish the attractiveness of Indonesia’s investment climate. According to the Indonesian Chamber of Commerce and Industry, around 17 per cent of a company’s total expenditure in the country is logistics costs, while in peer economies that figure is below 10 per cent.
Nowhere is the lack of investment in effective, long-term transportation infrastructure more evident than in Jakarta, which is consistently rated one of the world’s most congested cities. Having launched and then abandoned a monorail project, the capital is instead forging ahead with a Light Rail Transit (LRT) project that the city’s governor, Anies Baswedan, insists will be ready in time for the 2018 Asian Games in August, set to be co-hosted by Jakarta and Palembang. In addition to the 42km LRT, which is intended to connect the city centre with surrounding suburbs, Jakarta is spending at least US$1.7bn on a Mass Rapid Transit (MRT) project that, by 2025, will be a 112km-long integrated system comprising more than 60 stations. The project’s first phase, comprising seven elevated and six underground stations, is due to commence operations in early 2019. Meanwhile a consortium of several Indonesian state-owned companies with China Railway International Co. Ltd is building the country’s first high-speed railway – a US$6bn development to connect Jakarta to the textile hub of Bandung, slated for completion by mid-2019.
For now, it would appear Jakarta’s gridlock is getting worse before it gets better, as the city’s numerous construction sites intrude on road lanes, pavements and building entrances. Critics of Jokowi’s ambitious infrastructure development drive warn that it is too much too soon, and the government is forging ahead before securing sufficient state or private-sector funding – placing much of the risk on state-owned enterprises. Nonetheless, Rini Soemarno, Indonesia’s Minister of State-Owned Enterprises, maintains that the current bout of construction will ensure that the country can achieve “growth of six to seven per cent for the next 10 years” by focusing on previously neglected infrastructural development.
Easing maritime congestion
The President is certainly aiming to make up for lost time during his five-year term, having embarked on a campaign to build 1,000km of new toll roads, more than 3,200km of railways, 35GW of power and numerous airports, seaports and dams, all of which is projected to cost around IDR 4,800 trillion (~US$355bn). The sprawling geography of Indonesia – a country made up of more than 17,000 islands – implies a need to focus on maritime infrastructure, which is yet to be developed substantially, the result being that sea transport costs more than land transport across the nation. “The expansion of Indonesia’s ports is extremely important, not just for the connectivity of its islands but also to bring down logistical costs and raise competitiveness,” advised Sarvesh Suri, Indonesia country head for International Finance Corp., the World Bank’s private equity arm.
While seeking foreign investment to develop new ports in rural areas, the government has also committed to expanding existing ports such as Jakarta’s Tanjung Priok Port, which had not been expanded for 130 years despite container traffic having soared by more than 20 per cent annually, according to Indonesian Port Corporation. In September 2016, the President opened the new Kalibaru Port container terminal at New Priok Port, the first element of two major developmental programmes planned for the port, which are to be in full operation by 2024 with an overall capacity of 19.5 million TEU per year. The Jakarta project is one of five deep-sea ports featuring in the government’s campaign to improve Indonesia’s maritime logistics network. Others include Kuala Tanjung Port in North Sumatra (due to commence partial operations in January 2018), Makassar New Port on central Sulawesi island, and Kalimantan’s Kijing Port.
As Jokowi continues striving towards his ambitious infrastructure targets, Indonesia has become the second most profitable construction market in Asia, and the sector is expected to expand by 8.1 per cent in 2017. According to the latest Construction Technologies in Indonesia industry report, prepared by TechSci Research for the recently held Konstruksi Indonesia and The Big 5 Construct Indonesia events, the country’s construction market will be worth US$136.26bn by 2021, propelled by the national toll road and railway projects, energy and waste management ventures, and the so-called One Million Houses programme, which aims to build one million homes a year for five years.
Availability of affordable housing is crucial in a country where the official poverty rate stands at 10.6 per cent. While steady progress has been made in reducing poverty, almost 28 million Indonesians are still considered poor and a further 60 million people are at risk of falling back into poverty, according to the World Bank. “The environment globally and nationally has been challenging,” Perry Warjiyo, Deputy Governor at Bank Indonesia, told Bloomberg in October. “Since mid-2015, our economic recovery has been moving up and there have been some improvements in inclusive growth, but more needs to be done.” Considering Jokowi announced in January 2017 that narrowing the wealth inequality gap was at the top of his agenda for the forthcoming 12 months, soon it will become apparent whether enough is, indeed, being done.