Indonesia: Growth and the 'Infrastructure Roadmap'

Stronger Q3 GDP growth
The Indonesian economy continues to pick up steam. To recap, Q3 GDP growth came in at 5.0% y/y, well above the 4.6% consensus forecast and the 4.5% growth rate in Q2. Domestic consumption, which accounts for 73% of GDP, remains the main growth engine. Household consumption rose 5.1% in an apparent response to the elections passing off peacefully. The recovery in the IDR, together with low interest rates, will no doubt have also helped. Investment, which has been sluggish since the Asian financial crisis, is also finally picking up, rising by 13.1%.

The Government's 'Infrastructure Roadmap'
In order to raise Indonesia's growth rate further and meet its election promise of a 7% growth rate by 2009, the government is promoting its 'infrastructure roadmap,' which consists of an ambitious series of infrastructure investment plans. This includes building 1,600 kilometers of toll-roads in the next 5 years. The whole programme is expected to cost USD72bln, or around a third of GDP.

The government is committed to balancing its budget by 2007 so private investors will have to fund the bulk of the investment. The government expects commercial banks to provide some financing as they have about IDR150trln (around USD16.7bln) of excess liquidity parked at Bank Indonesia (BI) in the form of central bank bills and through the BI placement facility FASBI. The state pension fund Jamsostek is expected to contribute IDR30trln. These funds and additional financing from ASEAN countries are expected to help create the new Indonesian Infrastructure Fund (IIF) that the government is launching.

'Roadmap' Implementation Unlikely to be Smooth
To date, private investment in infrastructure has been slow given persistent legal uncertainties, notably regarding tariff adjustments, revenue sharing and land clearing. Future investors may well demand payment guarantees that the government may in turn be unable to give. Moreover, the reason banks have excess liquidity is because many have been traumatized by the experience of widespread corporate defaults (given a weak bankruptcy court). They are willing to lend mostly to the retail sector, which has a better repayment record. Banks also have to follow legal lending limits set by BI and their lending policy cannot be easily set by the government - even in the case of state banks. To encourage private investment, the government must first tackle such familiar issues as corruption, regional autonomy, labour issues and terrorism. We believe the government is committed to doing so, but the results will not be immediate. Thus, the 'roadmap' targets may potentially not be met as early as planned.

GDP Growth Still Set to Accelerate
However, even assuming for a slower implementation of the 'roadmap,' Standard Chartered Bank has revised its 2004 and 2005 GDP growth forecasts to 4.8% (from 4.5%) and 5.3% (5.0%) respectively. Given the current pace of policy and legal reforms, both domestic and foreign investment may rise more steadily, attracted by the fact Indonesia is the largest regional market and has abundant natural resources, not necessarily because it has a competitive investment climate.

Indonesian GDP Growth Forecasts
Data Source 2004 2005
Government 4.8% 5.4%
World Bank 4.9% 5.4%
Standard Chartered 4.8% 5.3%