Indonesia: Infrastructure drive to create investor opportunities

01 November 2017

Indonesia will offer significant opportunities for investors in the infrastructure sector, although land acquisition disputes may delay the completion of projects. Sectarian divisions are likely to come to the fore in the run-up to the 2019 presidential election, and this may raise the risk of protests. Indonesia will continue to enhance its counter-terror capabilities, although small-scale attacks by individuals linked to Islamic State are likely to continue.

Security Environment

The victory of opposition candidate Anies Baswedanin in the April 2017 Jakarta gubernatorial election indicates that sectarian issues will be of growing importance in the 2019 presidential election. Baswedanin utilised hard-line Islamist groups to court Muslim voters, whilst also highlighting the incumbent’s Christian faith. This could elevate protest risks ahead of 2019. In November 2016, Islamic organisations staged a large rally against the incumbent Christian governor, which was attended by as many as 200,000 people. Protests turned violent and at least 1 person was killed.

Indonesia’s government is strengthening its counter-terrorism capabilities in the face of a growing threat from Islamic State (IS). IS-linked individuals are suspected to be responsible for a May 2017 bombing attack which killed 3 police officers at a bus station in East Jakarta. In response, President Joko Widodo is seeking enhanced legislation that would allow the pre-emptive arrest of individuals suspected of involvement with overseas terrorism.

Despite enhanced security measures, Indonesia will continue to face a threat of low-capability terrorism in the 12-month outlook. Around 400 Indonesians are believed to have returned to the country from Syria. These individuals will have the skills to carry out low-capability incidents, likely using small arms, crude improvised explosive devices and knives. Probable targets include police, government assets and minority groups.

Trading Environment

Indonesia’s economy is forecasted to grow by 5.1% in 2017. This is below previous estimates for the year, as the mining sector continues to underperform. A mineral ore ban was relaxed in January 2017, yet the sector has not recovered as strongly as expected, with production growing by 2.2% y-o-y in Q2 2017. Confidence in Indonesian mining continues to be undermined by the government’s dispute with Freeport over the Grasberg mine and persistent industrial action. However, the government’s ambitious infrastructure investment programme will support strong performance in construction. In Q2 2017, construction activity expanded by 7.0% y-o-y.

The government is working to enhance fiscal discipline, introducing a 2.9% of GDP fiscal deficit target for 2017. Whilst this is close to the government’s 3.0% ceiling, the target is achievable. In H1 2017, revenues had increased by 12.5% y-o-y, reaching 49.2% of the annual target. Greater control over the fiscal position should reduce Indonesia’s use of debt financing, enhancing the sovereign credit position in the medium term.

Investment Environment

There will be substantial investment opportunities in Indonesia’s infrastructure sector in the coming years. Widodo continues to pursue a goal of implementing USD 423 billion of projects before 2025, in order to close the country’s infrastructure deficit. There are notable opportunities in Java, which is the region with the highest value project pipeline, whilst the power sector will see elevated investment levels in order to meet rising demand. This includes 7,000 MW in additional coal-powered generation capacity by 2024.

Private investment in projects is welcomed by the government, which, due to its own fiscal limitations, must rely on private financing for 60% of the USD 423 billion in spending that is planned.

However, private investors may be deterred by a significant number of project delays. In January 2017, 35 priority projects were at risk or delayed. Land acquisition will continue to be an obstacle to the timely completion of projects, despite the amendment of the Land Acquisition Law in 2015 to allow the forced sale of land for projects in the public interest. For example, work on the 2,000MW Batang coal power plant was delayed from 2012 to 2015, before a court order in 2016 finally resolved outstanding land issues and allowed the construction phase to begin.

Risk Outlook –November 2017

† Pricing is dependent on sector, and mining sector risks will be more challenging to market

†† Higher pricing is likely for sub-sovereign risks

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Spain, Guinea, Togo and United Arab Emirates, all of which have been the subject of recent enquiries from JLT's client base.

World Risk Review

The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

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For further information, please contact Mark Wong, Managing Director of Credit, Political and Security Risks at mark_wong@jltasia.com