IDONESIA, A sprawling archipelago of around 1.9 million square kilometres and with a population of some 245 million people, is increasingly being considered alongside the BRICs (Brazil, Russia, India, China) as an emerging market with the potential to be a major global economic heavyweight in the coming decades.

The country’s well-balanced economy has been recording solid rates of growth in recent years, averaging over six per cent, and it came through the global financial crisis relatively unscathed. Foreign investment is also growing rapidly, and policymakers are keenly focused on boosting economic growth. However, there are risks. Indonesia’s infrastructure is underdeveloped and in need of massive investment. Although the government has set an ambitious plan to address this issue, the required improvements to transport links, energy, and communications will take time.

There have also been worrying signs of growing nationalism in government policy, particularly regarding the regulatory environment for the mining sector, and this is undermining confidence. Nevertheless, there is no denying Indonesia’s huge potential for growth, not only in exploiting its vast reserves of national resources, but also in construction, particularly in developing the country’s infrastructure.

THICK SKINNED

Indonesia’s economy bounced back strongly after the disastrous impact of the Asian financial crisis in the late 1990s, during which the economy shrank by 13 per cent in real terms. In the following 10-year period, Indonesia’s nominal GDP increased from USD 235bn to USD 1.1tn, and per capita GDP soared from around USD 880 to USD 3,600. It is mainly owing to the fact that Indonesia has a relatively large domestic economy and a lower reliance on external trade than its Southeast Asian counterparts that it managed to continue posting healthy growth in 2009, while others such as Thailand and Malaysia experienced economic recessions amid the worst of the global financial crisis.

FUNDING CONTROLLED, BUT NOT UNAVAILABLE

The Indonesian government has maintained a prudent fiscal policy stance in recent years, which, along with a well crafted monetary policy, has put the economy into strong and stable growth. The government has succeeded in consistently maintaining the deficit below three per cent of GDP over the past 10 years. It has also managed to reduce its debt burden from a peak of 77 per cent of GDP in 2001 to just 24 per cent in 2012. Interest payments, which peaked to about 5.3 per cent of GDP in 2001, have also gradually been brought down, to just over one per cent of GDP in 2011, giving the government much needed room for reallocating resources for development purposes Based on the recently approved budget estimates provided by the Ministry of Finance, government revenue is expected to grow by 11 per cent in 2013, compared to 16.1 per cent in 2012. Income tax is projected to grow at a slower pace of 11.8 per cent in 2013, from 18.9 per cent estimated in 2012.

On the expenditure front, the government projects that its overall outlays in 2013 will grow by 7.1 per cent, slowing from an increase of 17.2 per cent in 2012. Capital expenditure is expected to grow by 15 per cent on the back of planned infrastructure development. Despite this expansion, the government is targeting a budget de_ cit equivalent to 1.7 per cent of GDP in 2013. It is partly owing to the improvement in the government’s fiscal health that international credit ratings agencies have upgraded Indonesia’s sovereign credit ratings. The rupiah, however, has shown itself to be volatile, losing seven per cent of its value against the US dollar in 2012. It is one of the worst performing currencies in Asia.

CONSTRUCTION SECTOR

Indonesia’s construction sector has been performing well in recent years driven by strong economic activity and high levels of investment. Indeed, fixed investment has soared over the past decade, with its share of total GDP rising from 19.5 per cent in 2003 to a historic high of 33.2 per cent in 2012.

The construction sector has been a clear beneficiary of this investment activity. It has grown by 7.4 per cent on an average basis in real terms over the past 10 years, well above the GDP growth rate of 5.9 per cent. It maintained this rate of growth in 2012, expanding by 7.5 per cent. In line with this trend, the construction sector’s share of total GDP increased from 6.2 per cent in 2003 to 10.4 per cent in 2012.

Despite some challenges, the outlook for construction is favorable. In nominal output value terms, the sector will grow by 15 per cent a year in the next five years, supported by urbanisation, rising incomes and the government’s effort to improve the infrastructure base as part of its ambitious multiyear plan – the Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development. In order to attract

investment for the master plan, which envisages spending of up to IDR 4,000tn (USD 400bn) during the 2011-2025 timeframe, the government is taking steps to strengthen public-private partnership regulations.

Infrastructure construction will be the leading sector for growth, but the other construction will also see healthy growth given the positive outlook and the rapid expansion of the country’s middle class. Indonesia has attracted massive foreign direct investment (FDI) in recent years, with the total rising to USD 24.6bn in 2012. However, the share attracted by the construction sector dropped to USD 240M in 2012 from USD 618.4M in 2010. FDI in construction dipped only slightly in 2008, before continuing on an upward trend in the following two years, but the slump in 2011-12 is a concern for the government as it tries to boost investment in infrastructure construction.

Although FDI in the construction sector has disappointed, domestic firms ramped up investment spending in 2012. According to data from the Indonesia Investment Coordinating Board, total domestic direct investment in construction soared to around IDR 4.6tn (USD 470M) in 2012. However, this followed two years of weak domestic investment in construction, averaging just IDR 666bn (USD 70M) a year.

The government is trying to kick-start rapid development of the country’s infrastructure, the state of which is currently a major drawback for investors. The government has already announced its intention to boost infrastructure construction spending, with proposals to spend IDR 194tn (USD 20bn) in 2013, up from IDR 169tn (USD 18bn) in 2012.

WAGES

Around seven million workers, some six per cent of the total labour force, were directly involved in the construction industry in 2012. This was double the number employed a decade or so ago. However, the rapid growth of the construction sector and the high demand for construction workers has seen labour costs rise on a steep trajectory. The wages and salary index calculated by Statistics Indonesia show that salaries and wages have increased by 19.3 per cent year-on-year on average in every month since 2009, much above its long term average of 3.9 per cent, reflecting strong activities in the sector.

Wages in general will remain on an upward trend in the coming years. Indeed, there will be a particularly sharp rise in 2013 in line with the government’s plan to allow minimum wages to increase by up to 40 per cent. Given the large portion of informal workers in construction, changes in actual wages are lower than increases in minimum wages.

OPERATING TRACK RECORD A RISK

Despite favorable conditions, the construction sector in Indonesia is set to face some challenges. The government appears determined to push ahead with its plans to invest in improving the country’s infrastructure. However, given longstanding problems in executing budget spending plans, there is a risk that the government will fail to proceed with these infrastructure projects in a timely manner.

There are also persistent worries over Indonesia’s excessive bureaucracy, while corruption is also another factor diminishing the quality of Indonesia’s business operating environment