Indonesian VP confident growth will pick up in second quarter

Despite disappointing GDP growth of below five per cent in the first quarter, the Vice President of Indonesia Jusuf Kalla said he was certain that the economy would pick up in the second quarter.

In an exclusive interview at Asia House, which followed an invite-only business luncheon and a private briefing for Asia House corporate members, Mr Kalla, who assumed office six months ago, was upbeat about Indonesia’s economic growth prospects. “The second quarter will be different, “ he said, “because starting in May the revised State Budget took force doubling our capital expenditure spending on infrastructure. We started spending on infrastructure in May so that growth in infrastructure will become effective,” he said. When asked whether GDP growth would recover to 5.3 per cent in the second quarter, he said “I hope so.”

Boosting economic growth and increasing domestic production have been a key priority for the reform-oriented Jokowi government, which came to power in October. Whilst Asian economies are forecast to grow at an average of  6.7 to 6.8 per cent this year, the Indonesian Government has set itself an economic growth target of 5.7 per cent this year.

“We can achieve this,” Kalla said confidently. “New laws will be implemented this year that will say that land can be acquired directly for public projects and, if not, according to the court,” he said.

Many large infrastructure projects in Indonesia have been held up due to land acquisition issues. One example is a $4 billion project, which is set to be Southeast Asia’s biggest coal-fired power plant, in the Batang region on the island of Java. It has been held up for four years as landowners have refused to sell their land. The 2,000-megawatt Batang project will be built and operated by PT Bhimasena Power Indonesia (BPI), a joint venture company set up by Indonesian coal miner Adaro Energy and Japan’s Itochu and Electric Power Development (J-Power).

The country’s power demand is growing at more than seven per cent a year. Supply is unable keep up with demand, power cuts are still common in many parts of Indonesia, and many people in remote areas still don’t have access to electricity. Indonesia is the most populous country in Southeast Asia and the fourth most populous country in the world, behind China, India, and the United States. The rapid expansion of the consumer class in Indonesia, together with business demands, have put great pressure on existing electricity supplies. The government plans to increase power generation by 35 gigawatts of electricity within the next five years to meet rising demand.

However infrastructure investment has to date been low in Indonesia at only three to four per cent of GDP, well below many of its neighbours.

Over the next five years, it is estimated that Indonesia needs a total of IDR 5,452 trillion (USD $477 billion) worth of investment to support its infrastructure development – the greatest of all of the ASEAN nations.

The revised State Budget is an update of the 2015 State Budget approved by Parliament in September 2014 during the previous administration of President Susilo Bambang Yudhoyono. Passed in May without significant opposition, it is the first one proposed by President Joko Widodo since he assumed office on 20 October 2014, giving an insight into his priorities.

In the 2015 State Budget Mr Widodo announced that spending on infrastructure this year would be more than double the IDR 139 trillion it was last year at IDR 290 trillion (US$23 billion) this year. The Government plans to spend this on power plants, ports, railways, dams and roads in a move that it is hoped will also boost investor sentiment.

Indonesia’s growth has stalled in recent years. It grew at more than six per cent between 2010 and 2012. The World Bank is slightly less optimistic about growth rates this year and has forecast economic growth of 5.2 per cent and the Asian Development Bank projects 5.5 per cent this year.

Mr Kalla said the Government was in the process of carrying out further reforms to bring the economy back on track. “We are pushing for more infrastructure and more investment in the processing industry and that’s why we are not allowing the exports of raw materials. They should be processed first. Investment in that is needed for the next two to three years and we anticipate that in two years from now our exports will be of higher value than they were before,” he said.

“When it comes to power generation and electricity projects we have double the projects compared to before,” he said. “We are inviting foreign investment into all of our projects and we also hope to fund them using public-private partnerships (PPPs).”

He added Indonesia was very positive about the Asian Infrastructure Investment Bank (AIIB), which is expected to be established in Beijing by the end of this year and he said he hoped it could help finance many of these infrastructure projects, 80 per cent of which will need to be funded by the private sector.

“China is the backbone of this bank and it has got a big trade surplus. This bank will be more aggressive which is better for us,” he said, looking excited. Despite being in mid-sentence, the interview came to an abrupt end as he was whisked away by his security to a meeting with Prince Andrew at Buckingham Palace.

naomi.canton@asiahouse.co.uk

To read about a private briefing that Mr Kalla gave to Asia House corporate members click here.

To read about the speech that Mr Kalla gave to more than 80 business leaders at a lunch at Asia House click here. 

To find out more about corporate membership click here. 

HE Le Luong Minh, Secretary-General of ASEAN for 2013-2017, is a keynote speaker at a conference being held at Asia House on 12 June in partnership with KPMG drawing on the findings of KPMG’s MNCs in ASEAN report. For more information on the conference click here.