Jakarta struggles to cope with rapid growth

For a lesson in the promise and pitfalls of Indonesia’s economic resurgence, hours stuck in traffic on Jalan H R Rasuna Said, one of the main thoroughfares in Jakarta, is as good a start as any. The glut of idling new cars tells one part of the story: strong growth. The Indonesian economy, the largest in Southeast Asia, grew 6.1 per cent last year, and domestic consumption is increasing.

Indonesians bought 2,86,000 cars in the first four months of this year, according to the Indonesian Automotive Association — 16 per cent more than in the period last year — and it can sometimes feel as if they have all congregated in one place.

But the country’s infrastructure has not caught up. A dedicated bus lane relieves some of the pressure from commuters, but heavy rain frequently floods the road. Along the middle of the street, abandoned concrete pylons stand as memorials to a plan to build an urban monorail system, begun in 2004 but left to languish after money troubles and legal disputes among partners.

For businessmen like Stefanus Sulimro Lim, who runs a midsize freight forwarding company, Global Abadi Perkasa, it is a worsening headache. Clogged ports, potholed roads and persistent gridlock mean extra costs in the form of blown truck tyres, broken shafts and wasted time.

“About 10 years ago, one truck could go to two places,” Lim said of work in Jakarta. “Our truck could go to one customer, do their stuff in two or three hours, then we could truck back to the port and do another job, all in the one day.” These days, he said, trucks must be sent to the port of Jakarta the night before just to get one job done.

Lim’s frustration contrasts with the enthusiasm of international investors for Indonesia.
Considered only a few years ago as a laggard in the region, Indonesia is fast becoming a darling of financial markets. Foreign investment in the country rose 52 per cent in 2010, to $16.2 billion, from the previous year. The credit rating agency Standard & Poor’s raised its sovereign debt rating for Indonesia to BB (Plus) last month, becoming the last of the three big agencies to rate the country one peg below investment grade.

Growing forex reserves

The improving grades from the ratings agencies are considered a reflection of sober fiscal management under President Susilo Bambang Yudhoyono, who has overseen falling public debt ratios and growing foreign exchange reserves. The country is widely expected to reach investment grade next year, drawing it closer to emerging market heavyweights like China and India.

But as the attention on Indonesia grows, so does the focus on flaws that, according to analysts, may restrict future growth. The country, with a population of 240 million, suffers from corruption, its bureaucracy is inefficient, and — most important, economists say — its infrastructure is strained to the limit.

The Indonesian central bank predicts the economy will expand as much as 6.5 per cent this year, based on strong domestic consumer demand and booming commodity exports.
But Muhammad Chatib Basri, an economist at the University of Indonesia, said that this was not enough. For Indonesia really to develop, it needs to attract investment in labour-intensive industries, he said, rather than focusing on exporting commodities, like palm oil and coal, which creates relatively few jobs.

“For the short term, it should be ok,” Basri said. “But you cannot rely, for the country, on what’s been happening on the external side. Because one day the commodity price or energy price may collapse, and it’s going to affect us. In my view, the most binding constraint is infrastructure. Because without improvements in infrastructure, I don’t think economic growth of more than 5 per cent will be sustainable.”

Across the country, the underpinnings of power and transport networks are fraying. Ports and airports are largely antiquated and inefficient, while frequent electricity shortages cause disruption to homes and businesses.

Gridlock in Jakarta is estimated by the government to cost the economy $1.5 billion a year, through wasted fuel, lost working hours and illness. Plans to improve infrastructure, like a project to complete a series of toll roads across the island of Java by 2014, routinely run into barriers, largely because of the frustrating difficulty of acquiring land.

The Indonesian government is moving to address the problems. One flagship change, a long-awaited bill on land acquisition that would make it easier to take land for infrastructure projects in return for compensation, is expected to be passed by the Indonesian House of Representatives this year, although it has faced some resistance.

The head of the Indonesia Investment Coordinating Board, Gita Wirjawan, said that such change, as well as the efforts against another Indonesian scourge, corruption, meant the path would soon be cleared for greater investment in infrastructure and industry.

“We’re not like China,” he said. “We don’t make decisions like China does.” Indonesia is “a democracy, a newly working democracy that’s trying to understand how to put the different pieces of the puzzle together.”

Beyond primary industries

Wirjawan pointed to the latest investment data to back his assertion that foreign investment was flowing beyond Indonesia’s primary industries like mining and agriculture: $13.2 billion of the $16.2 billion in foreign investment last year went to industries like transportation, food and manufacturing.

“I think there’s going to be more and more money being put into manufacturing and infrastructure,” he said. “That’s good. That’s what I call smart capital.”

Indonesia, he said, also finds itself in a demographic ‘sweet spot’, with about 60 per cent of the population 39 years old or younger, an opportunity that will prevail for the next 15 years.

Despite some misgivings, analysts said, Indonesia was likely to be bumped up to investment grade soon.

“Our view,” said Andrew Colquhoun, the head of Asia-Pacific sovereign ratings at Fitch Ratings, “is that Indonesia is likely to be upgraded to investment grade in the next 12 to 18 months, based on trends of a strengthening growth performance driven by rising investment, falling public debt ratios and strengthening external finances supported by rising reserves, although inflation remains a concern.”

A spike in year-on-year inflation to 7 per cent in January prompted the central bank to raise its benchmark interest rate a quarter of a percentage point, to 6.75 per cent — the first increase in more than two years. Inflation — a problem for many fast-growing economies across Asia — has eased somewhat since then, slowing to 6.18 per cent in April.

For Fauzi Ichsan, senior economist in Indonesia at the bank Standard Chartered, the country remains an attractive destination, despite its flaws. “Even though infrastructure development is slow, the other two pillars of the economy — ie, domestic consumption and commodity exports — are doing well,” he said. For a limited few, the status quo is just fine.

Beside the abandoned pylons of Jakarta’s abortive monorail, Taufik, a driver of a motorcycle taxi, or ojek, said his living depended on transporting frustrated commuters who wanted to skip ahead of the gridlock.

“The traffic’s great for ojek drivers because it leaves people looking for an alternative,” said Taufik, who like many Indonesians uses only one name. And as for a congestion-relieving monorail planned for some time in the future, he laughed. “It’s probably never going to happen.