AFTER a slow start this year, Indonesian government spending on infrastructure looks like it might begin soon. That’s good news for an economy desperate for stimulus.
Data from the public works ministry show more than 90 percent of planned projects have been tendered, with contracts signed for more than half of those. The ministry receives about 40 percent of the government’s 2015 infrastructure budget of 290 trillion rupiah ($21.7 billion).
“Aside from the first few months, we can say so far, so good,” said Joko Sogie, a construction industry analyst at PT Danareksa Sekuritas in Jakarta. “Things should start flowing.”
Investors had been been hoping for faster spending from President Joko Widodo, a former furniture salesman elected last year on a platform to lift growth by building roads, power plants and ports. That has yet to happen, as he struggles to govern the country’s elite, cut through the bureaucracy and overcome the challenge of acquiring land for projects.
The planned spending might be too little, too late to revitalize the country’s slowest growth rate in more than five years before the end of this year. It can take months or years to break ground once a contract is signed.
“The president committed not to carry out so much groundbreaking but guarantee the execution of projects,” said Lin Che Wei, chief executive of PT Independent Research & Advisory Indonesia, after meeting the president and economists on Monday. “We told him it was better to under promise and over deliver.”
Tax shortfall
Second-quarter growth is predicted to pick up to 5 percent, from 4.7 percent from January through March, according to a survey by Bloomberg News. Full-year expansion is seen at 5.1 percent, well below an original budget target for 5.7 percent that Finance Minister Bambang Brodjonegoro says will be difficult to achieve. The government will now strive for 5.2 percent, he said earlier this month.
As of May, the public works ministry had spent 9 percent of its budget, according to its data. That is about par for a country where the bulk of government spending has traditionally occurred toward the end of the year.
The government is relying partly on higher tax collection to fund the spending, yet as of May it had reached less than 30 percent of its 2015 target. That compares to nearly 40 percent at the same time last year.
“It could turn out to be a longer soft patch if policy-makers don’t do enough,” said Su Sian Lim, an economist at HSBC Holdings Plc. “The concern is the domestic part of the economy will sink very noticeably and infrastructure is not picking up the slack. It’s not like you break ground today and tomorrow you have hired 10,000 workers.”
Consumer spending slows
Government spending, along with foreign investment, will need to be the main drivers of Southeast Asia’s largest economy this year. With inflation above 7 percent, the highest among 17 Asia-Pacific economies tracked by Bloomberg, and a rupiah that’s fallen more than 7 percent against the dollar this year, there is little scope for the central bank to cut rates anytime soon. Exports are likely to remain soft.
A slowdown is evident in consumer spending, which accounts for more than half of the economy. Motorbike sales fell in May to their lowest since August 2012, and other indicators show confidence has yet to pick up, as the attached chart shows. Recent measures to boost spending power include a plan to raise the level of nontaxable income and looser lending rules for purchases of cars, motorbikes and homes. The micromeasures follow calls by political parties for a Cabinet reshuffle to improve the government’s economic performance.
“The second half of 2015 will be a crucial test for Jokowi,” said Achmad Sukarsono, Indonesia analyst at Eurasia Group in London. “He needs to have more aggressive ministers, he needs to put his foot on the gas pedal. Without the infrastructure drive he will be judged as a mediocre president.”
Image credits: AP/Achmad Ibrahim