Last year, Indonesia passed a historic land reform law designed to speed the land acquisition process, guarantee fairer compensation for landowners and increase spending on infrastructure.
As The Financialist has reported, the new regulations could spur as much as $250 billion in public infrastructure investments over the next four years. The government has allocated $20 billion for infrastructure projects in 2013 alone, the highest rate of investment in Indonesia’s history, Credit Suisse Research Analyst Teddy Oetomo wrote in a recent strategy note.
The investment in infrastructure is happening at an opportune time. China, a key trading partner, is set for slower growth, and Indonesia needs to spur domestic demand from its 238 million-strong population to cushion slumping demand from abroad. But the domestic market won’t grow to its full potential without power plants that can reliably produce electricity, roads that connect suppliers to markets and airports that allow foreign investors to come and go easily, Oetomo tells The Financialist.
“The land reform is very important because it allows you to get the next wave of investment,” he explains. “If we do not deliver these public infrastructure (investments), we will not attract the sort of mid-size companies that create jobs and growth.”
Jobs are key to developing domestic demand, and Oetomo points out that small to mid-size businesses drive most job growth. Currently, though, investments supporting Indonesia’s economy come primarily from a few large companies, such as conglomerate Astra International and hydrocarbon giant Pertamina. While these big firms have deep enough pockets to finance their own roads and power plants, they are not in a position to carry the entire economy.
“You can’t rely on just big companies,” says Oetomo. “The mid-size companies provide a solid economic base.”
Since smaller companies cannot afford to build infrastructure on their own, it falls to Indonesia’s government to significantly improve the country’s overall infrastructure.
“If you want to attract that crucial next-wave of investments from these smaller businesses, you need more public infrastructure,” continues Oetomo.
There are already signs that economic growth is slowing in Indonesia. GDP is expected to expand by 5.6 percent in 2013, below the 6.3 percent forecasted growth for the whole of 2012. Most analysts blame the slowdown in China for Indonesia’s expected slump.
Mindful of the economic pressures, the central government in Jakarta is not waiting for the crucial land reform law to take effect before improving its infrastructure. This year alone, the country went live with about 660 megawatts of new electricity with plans to bring an additional 2,340 new megawatts online next year. In 2013, the country will also open five new toll roads.
With land reform kicking in soon, even more infrastructure projects are in the pipeline. That means Indonesia’s long-term future might bring a healthy growth in domestic demand that reduces the country’s dependence on exports.