Indonesia's construction industry to gain from openness to BRI: Fitch

DECEMBER 20, 2018 - 5:15 PM

Indonesia's receptive stance towards China's Belt and Road Initiative (BRI) will be a boon to its construction industry over the next decade and help sustain the current rapid pace of development, said Fitch Solutions Macro Research in a report on Dec 18. It noted that private and foreign capital is crucial in bridging the country's widening infrastructure gap.

The report noted that BRI projects account for almost 20 per cent of the value of Indonesia's infrastructure projects that are now being planned or built, "demonstrating Jakarta’s willingness to embrace Chinese investments". This comes at a time when many other BRI countries are reevaluating their partnership with China over issues of national security, growing indebtedness to Beijing and a reliance on Chinese labour and equipment in procurement.

In contrast, Indonesia recently announced that it is offering new projects worth up to US$60 billion -- almost half the current value of the Indonesian construction industry -- to Chinese investors. "These developments, if realised, will provide a tremendous boost to Indonesia’s construction industry and hasten the pace of infrastructure development over the next decade," said Fitch Solutions. Its forecast is for the Indonesian construction industry to average real growth of 7.2 per cent from 2019 to 2027, to be revised upwards "when more tangible commitments have been made by the two sides".

Bridging the infrastructure gap

Indonesia's economy has grown at an average of 5.1 per cent over the last decade and -- based on Fitch Solutions' projections -- is set to grow at an average of 5.7 per cent from 2019 to 2027. Yet infrastructure development has lagged behind. Budgeted public infrastructure spending for FY2019 is 420.5 trillion rupiah (US$28.8 billion), just 6 per cent of the infrastructure deficit of US$500 billion reported by the World Bank in 2017. More private sector involvement is thus expected as the government pushes ahead with its ambitious infrastructure development plans.

China's involvement is also expected to grow, with Jakarta having already partnered Beijing in awarding the US$6 billion Jakarta-Bandung High-Speed rail project to Chinese investors. "However, the embrace of BRI projects is not without preconditions and Jakarta is cognizant of the potential repercussions of growing indebtedness towards China," noted Fitch Solutions.

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The government intends to take a business-to-business structure for future deals and will reportedly refuse to accept projects funded by government-to-government loans. This will shift the debt risk from the public to the private sector, allowing Indonesia to continue attracting Chinese funding while not affecting government debt levels.

Another trend in infrastructure development will be greater geographical diversity. Although construction activity in recent years has been concentrated in Jakarta and the surrounding provinces of Banten and West Java, the Jokowi administration is aiming to decentralise business activity away from Java. Fitch Solutions highlighted several projects within Jakarta’s latest round of negotiations with Beijing: four hydropower plants in North Kalimantan, as well as coal-fired power plants, industrial complexes, ports and other infrastructure in Central Kalimantan, North Sumatra, North Sulawesi and on the resort island of Bali.