Nama : Dyah Retno Wulandari
NPM : 22211296
Kelas : 3EB18
Infrastructure investment: How
fast can it grow?
Indonesia
has earned a respectable place among investors in recent years. It
ranked fourth on the list of the top 20 countries with the best prospects for
foreign direct investment (FDI), according to a 2013 report by the United
Nations Conference on Trade and Development (UNCTAD). UNCTAD also revealed that among ASEAN countries,
Indonesia was the second-biggest recipient of FDI after Singapore.
FDI to
Indonesia grew well up through 2011. The flow
of FDI in 2011 was five times greater than it was in 2009. Strong growth
also occurred in domestic investment. According to the figures from the
Investment Coordination Board (BKPM), investment under the domestic investment
plan (PMDN) grew by 25 percent in 2011.
It is not
hard to find an explanation for Indonesia’s investment attractiveness. It has something to do with demography
and geography. Indonesian consumers, mostly a dynamic young population with
rising wealth, have become a huge market that investors cannot afford to
ignore. Geography
reveals a country with large supplies of untapped natural resources. That is why until now the mining sector has been
the biggest investment destination for both foreign and domestic investors.
However,
investment flows have started to taper off recently. Domestic
investment grew 12 percent in 2012, well below the 25 percent in 2011. FDI
was US$19.5 billion in 2012, about the same as in 2011. And the
prospects for investment in 2014 will be clouded by many uncertainties. Several domestic factors will play a role in shaping Indonesia’s
investment climate this year.
First, monetary tightening by the central bank, Bank Indonesia (BI), will
continue through 2014.
BI policies to rein in bank loan growth
will not only restrict the available amount of funding but will also
increase borrowing costs as interest rates will remain elevated. The tightening of monetary
conditions will also come from the tapering of the US Federal Reserve’s
bond-buying program,
which is expected to occur early 2014. The Fed’s tapering will add to the severity of liquidity
contraction.
The tightening of monetary conditions will affect the
growth of sectors that heavily depend on outside financing and are sensitive to
interest rate increases like property and infrastructure. Home
buyers will have to pay higher interest rates and down payments, and this could
slow down housing demand. The slowdown in housing purchases and construction activities will
dampen the growth of demand for its supporting industries like building
material industries, household fixtures, furniture and consumer durables.
Second,
insufficient investment in infrastructure such as ports and roads has
contributed to serious traffic congestion, which will not be solved in the
short term, hence Indonesia’s relatively poor logistics performance. Capacity
constraint in logistics and weakness in institutional arrangements have
affected Indonesian logistic performance adversely, pushing up costs and
reducing export competitiveness. Poor connectivity could undermine efforts to attract
investment in manufacturing as transportation costs become more expensive.
The
government has introduced a public-private partnership (PPP) plan aimed at
attracting private investors in infrastructure investment. But private
investors will have to depend on offshore financing due to the limited capacity
of domestic banks in financing infrastructure projects. But because of
tightened global liquidity, offshore financing will be more costly and more
difficult to get.
New construction projects for toll roads and power
plants, especially those being planned by the private sector, may have to be
delayed as overall cost and available funding will have to be reviewed.
The
other problem hindering infrastructure development is land acquisition. Despite the
enactment of the law on land acquisition for public development in December
2011, legal proceedings for land acquisition take a very long time, delaying
project construction.
It is
worth noting that at the Asia-Pacific Economic Cooperation (APEC) Summit in
Bali in November, Japanese Prime Minister Shinzo Abe complained in a speech
about the delay in completing land acquisition for a Japanese financed
coal-fired power plant in Batang, Central Java. That
a foreign head of state at an international forum mentioned a land problem in a
small town in Java demonstrates how serious the problem of land acquisition for
infrastructure projects is in Indonesia.
Infrastructure
development also suffers from inefficiency and waste, because although expenditures in nominal
terms have increased, repair and maintenance have not improved. Even
newly completed roads are below standard, often because of markups and
corruption. Before long, these roads will become damaged
and need repair.
Third,
industrial relations will remain uncertain, arising from
the weakness of the government in dealing with labor union demands. Labor strikes that could disrupt production will continue to occur
this year, with demands for a higher minimum wage persisting. It will remain difficult for the government, employers
associations and labor unions to agree on a mechanism to set wages based on a
set of objective and relevant criteria.
It
would also be difficult to depoliticize the process of setting the minimum
wage. Indonesia faces the risk of losing its competitiveness in labor to other
countries such as Vietnam, Cambodia and Bangladesh.
Fourth,
the continued weakness in commodity prices will slow down investment
in related industries. This will slow down investment in heavy equipment and
machinery.
Fifth,
rising nationalist sentiment, for example the Mining Law and government
inconsistency on trade and the negative investment list (DNI), has eroded
investor confidence and trust in the government.
All of the aforementioned factors may result in
negative sentiment that will curb investment growth. However, in the face of this negative
outlook, some industries still have a chance to grow.
First,
consumer goods and retail industries will have better growth prospects than
other industries due to still strong domestic consumption. Indonesian consumers, especially the growing middle
class, will prove resilient amid slower economic growth and higher inflation. They will continue to spend money. Spending for the 2014 general election will also stimulate economic
activities. As a result, consumption ought to remain the
main driver of Indonesian economic growth in 2014.
Labor intensive, export-oriented industries will get a
boost from rupiah depreciation and tax relief being
planned by the government. The extent of their opportunity
for growth will depend on how many imports they need in their production
process, as higher import taxes will come into force. But a regulation for easier import tax payment by
exporters issued recently by the Finance Ministry ought to help these
industries, in terms of improved cash flow, thus reducing working
capital costs.
The
government has issued two economic packages, one in August and another in
December 2013. But given the weakness of the global economy in 2014, and the complexities
of infrastructure development and bureaucratic reforms, it will be difficult for Indonesia
to restore investment growth as in previous years and to maintain its
reputation as one the most attractive investment destinations in the world.
Source :
Winarno Zain, Economist, Jakarta | Mon,
January 27 2014, 6:55 PM (http://www.thejakartapost.com/news/2014/01/27/infrastructure-investment-how-fast-can-it-grow.html)
Note :
Aiueo : Simple Present
Aiueo :
Simple Past
Aiueo
: Simple Future
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