Indonesia Infrastructure Report Q2 2009

As a response to the global economic downturn, Indonesia's government has announced a huge fiscal stimulus package centred on an infrastructure construction programme. According to Finance Minister Sri Mulyani Indrawati, the programme may begin in March 2009. Indonesia has set aside IDR90trn (US$7.5bn) for the budget in 2009 for infrastructure spending and an additional IDR8.4trn (US$703mn) will be allocated for labour-intensive infrastructure projects.

However, a key concern surrounds how the projects are to be funded. The government has set up the Indonesia Infrastructure Fund Facility (IIFF) to attract financing for the projects. Thus far, the Asian Development Bank (ADB) has agreed to provide up to a quarter of the funds required (IDR1trn). The remaining IDR3trn may be provided by the World Bank and the German Development Bank (KfW), according to Bambang Susantono, the deputy to the Coordinating Minister for the Economy in charge of infrastructure. However, the IIFF will probably be insufficient to cope with the extra spending and we would expect the government to issue more bonds in the coming year.

In the power sector, similar issues are being felt. State-power electricity firm PT Perusahaan Listrik Negara (PLN) has been facing mounting problems regarding financing for its expansion programme.

Reuters reported that Chinese lenders are asking for higher interest rates as a result of the global financial crisis. Chinese banks have thus far financed US$5.5bn of debt raised by PLN for its US$8bn capital expansion programme. However, the Jakarta Post reported in February 2009 that China has actually only dispersed US$2bn and has since frozen further financing. Reuters quotes the executive director of PLN saying that the construction work depends heavily on securing financing in time, otherwise there are bound to be delays. PLN's current expansion plan consists of investing US$8bn in 10,000MW of coalfired electricity-generating capacity.

In the short term the construction sector is being impacted by the financial crisis. Companies are finding it difficult to raise financing for projects and liquidity conditions are tight. However, the strong commitment from the government through its economic stimulus package should help to shore up growth. BMI forecasts that the construction sector will reach a value of US$78bn in 2013, up from a figure of US$38.8bn in 2008. It should be noted that Indonesia's economy is better placed to weather an economic downturn, as it is not heavily reliant on exports and thus the outlook is certainly among the most positive ones in Asia Pacific. This is expected to cascade in the construction and infrastructure sector as and we thus forecast that Indonesia's industry value real growth will remain on the positive side during our forecast period, registering on average a 6.3% annual growth.