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Following Indonesia's slow recovery from the financial
crisis, growth in the country's construction sector has been lagging.
Will things stay this way going forward?
Ten years after the financial crisis, construction activity has not
fully recovered. The contribution of construction to GDP has been
gradually increasing over the past five years, although it has not
reached pre-crisis levels yet. Construction as a share of GDP only
amounted to 7.5 percent in 2006, still below the pre-crisis level of 8
percent.
This situation has forced the country's infrastructure sector to
re-enter a phase of major growth in the construction of public, as well
as private, infrastructure, which will eventually boost and support
future demand for construction services.
Going forward, the domestic construction industry looks set to
experience robust growth in line with economic expansion.
Development of public and private infrastructure is needed to attract
the foreign and private investments that are necessary for supporting
GDP growth.
In the 2002-2006 period, the construction industry grew on average by
7.1 percent, while GDP grew concurrently by 5.1 percent. As Indonesian
growth is expected to rise towards the six percent level this year
(versus 5.5 percent in 2006), construction growth is expected to surge.
As for this year, investment is expected to soar as the macroeconomy
stabilizes.
So, what are the factors that help to boost demand for construction
services?
Indonesia's benchmark interest rate may further decline toward 8.5
percent by the end of the year from the current level of 9 percent. Oil
prices have risen, but on average are lower than last year
(US$60/barrel versus US$66/barrel).
These conditions, along with the absence of major administered price
adjustments, should encourage both private and public sector
construction projects.
Moreover, the government has been striving to improve the statutory
framework so as to make the infrastructure projects offered to
investors more attractive and bankable. Under Presidential Decree No.
65 of 2006, the government will encourage accelerated infrastructure
development in Indonesia through investment cooperation, revolving
funds, subsidies (public service obligation), guarantees and tax
waivers.
The various new regulations that have been introduced should serve to
attract potential local and foreign infrastructure investment inflows,
thus benefiting suppliers of construction and civil engineering
services.
According to the government, Indonesia's infrastructure needs to expand
by over US$150 billion between 2005 and 2010. However, only 17 percent
of this can be financed from the government's own resources.
Hence the government is actively encouraging the participation of both
local and foreign investors in developing the country's infrastructure.
As for this year, the central government has allocated nearly 20
percent of this year's overall budget spending to public infrastructure
development, consisting of both multi-year and single-year projects.
Although delays cannot be ruled out, most of the construction work is
expected to start in April and be completed by mid-December
(single-year projects). The terms of the tenders will favor those
companies requiring the least government support, but which possess the
highest levels of expertise and experience.
In addition, 19 infrastructure projects costing Rp 63 trillion (US$6.8
billion) will also be put out to tender in 2007, including thirteen
toll roads (worth Rp 43 trillion) and three water supply projects
(worth Rp 950 billion), as well as a ferry port, an international
airport and the national fiber-optic cable network.
But in spite of all the good news and support from the government,
progress in terms of actual construction remains fairly limited,
especially in the case of public infrastructure projects.
This is shown by the fact that fewer than ten projects offered at the
January 2005 Infrastructure Summit have entered the construction phase,
while the majority of the remaining projects are still stuck at the
tender and prequalification stages.
None of the projects offered in the 2006 Indonesian Infrastructure
Summit (Infrastructure Summit II) have been realized. In fact, the
tender processes for these projects have not even been completed.
Among the factors that have made these projects less attractive are
regulatory restrictions, high commercial-risk levels, difficulties with
land acquisition and the surge in inflation that followed on from the
slashing of fuel-subsidy spending (which resulted in the prices
submitted during the tenders being rendered outdated).
Therefore, the demand for construction services in Indonesia will
depend on the investment climate (though not necessarily FDI), as well
as the supporting government regulations.
If one is convinced that substantial improvements are forthcoming, then
the outlook for the construction services industry, as well as for
other sectors directly related to it, such as cement, heavy equipment
and property, should also be robust.
Therefore, investment in construction-related stocks would currently
seem to be a notion worth considering.
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