Finbarr Bermingham reports on the problems facing Indonesia’s export sectors, and the troubles confronting those trying to get around the country.
On a muggy day in Jakarta, there were numerous reasons for those in the country’s trade sector to be concerned.
No matter the angle, the outlook is bleak. As President Jokowi was over in Europe holding court with the leaders of Germany, the UK and more, those in Jakarta were left to wonder whether there was anything positive to discuss at all.
Indonesia relies on commodity exports for around 60% of its total overseas sales, many of which go to China. Think about the things that Indonesia sells overseas: iron ore and nickel for steel, coal for use in power plants, rubber for industry, copper for electrification and controversial palm oil for a range of consumer goods.
All of these markets are facing existentialist crises of some description, be they for climate and environmental reasons, or for a simple lack of demand.
A poll of the attendees of the GTR Indonesia Trade and Commodity Finance Conference revealed that the price of oil was their biggest concern, but one might have been forgiven for feeling that the influence of the international media might be at play here. For while crude lost 44% of its value over 2015, Indonesia is not a net exporter, since it has no refineries of its own.
There are much greater areas of concern. Of some of the other key exports: crude palm oil (CPO) fell by 13%, coal fell by 29%, while rubber dropped 26%. For provinces such as East Kalimantan, Aceh and Riau, this loss in value has hollowed out export bases.
On a panel discussing commodity trading, Jeffrosenberg Tan, a fund manager at Sinarmas Asset Management, encouraged the audience to plough their money into CPO, which has seen significant price growth in 2016. However, he failed to mention the role that may have been played in this by the most severe El Niño on record, as confirmed by climatologists in April.
But the gravest concerns must be reserved for coal. While the demise of one of the most heavily-polluting products on the market should be a cause for celebration, it’s worth recalling those who are left to deal with the often tragic situation it leaves behind.
Much as the closure of coal mines in the west in the 1980s and 90s destroyed whole communities and left thousands unemployed, so it will come to pass in Indonesia.
Already, says Brahim Zerouki, commodities trading advisor at Tricore Kapital Sarana, small producers have been closing their operations by the hundreds. With China trying to move away from the cheap coal produced in Indonesia, India trying to use its domestic product and nobody else seemingly in a position to pick up the demand, it’s hard to see a future for the sector.
Banks too have endured a tough start to the year. Even before a word was spoken on stage, numerous conversations revealed that deal flow was down. Most bank capital is flowing towards the top end of the market, with banks re-evaluating their risk profiles in a bid to comply with capital holding requirements and to keep their heads above water. Again, it’s the little guys that lose out.
This, according to Ridwan Susanto, HSBC’s Indonesian head of commodity and structured trade finance, means there is less new business being booked, with traders having to do more than ever before to obtain credit.
And while seasoned traders such as Zerouki often bear the brunt of such changes in tack, he admitted that he would probably adopt the same approach as banks.
The government lowered the interbank rate for the third time this year in April, but it has had little material impact in loosening credit. Indonesia’s chameleonic regulatory environment is also making life difficult for some.
It has been one year since the letter of credit (LC) law was introduced with a view to keeping a closer eye on the amount of raw materials leaving the country. The law forces exporters of key commodities to use LCs in their shipments. The affected commodities, combined, account for some 41% of the country’s exports.
On paper, it should mean more business for banks, but Susanto at HSBC said that the amount of business it has generated has been negligible and while most support the sentiment behind the law, the extra layer of bureaucracy has made a tough time tougher for the smallest exporters in the country.
The mood was not helped by the transportation problems that plague life in Indonesia. Sometimes the journey from the airport to the city centre is a breezy half hour, others it takes most of the working day.
The usual conference small talk inevitably begins with tales of delayed journeys, while a brief post-event sojourn to some Indonesian islands almost resulted in a missed flight, with the narrow, jammed roads from Bali port to airport taking four hours to navigate.
Such stories have become synonymous with the infrastructure woes of Indonesia. But a sector that requires hundreds of billions of dollars of investment could be the saving grace for an economy that’s going from bad to worse. At least this was the hope of various speakers over the course of the day.
You can read elsewhere in this issue about the infrastructural situation around the globe, but Indonesia is a unique case. It is an amalgam of islands, peninsulas and cultures, almost every one of them congested, as 300 million people attempt to get from A to B.
KPMG says Indonesia needs US$70bn of infrastructure investment imminently. The Asian Development Bank (ADB) puts the long-term figure at 10 times that. However, all agree that trade in Indonesia will continue to languish until some of that capital is put to work.
The construction effort alone would help pick up some of the oversupply in the aforementioned commodities lying in warehouses around Indonesia. But where will this money come from? Perhaps Jokowi’s European trip will yield some dividend, but delegates at the event voted on a three-pillared financing assault from development banks, commercial banks and the Indonesian state budget.
On the development bank front, the ADB last year committed to tripling its budget for Indonesia, while there are already six projects under consideration by the nascent Asia Infrastructure Investment Bank (AIIB). The totality of these would be US$12bn – some way short of the deficit.
Dominic Zimmer, the head of export finance for Asia at LBBW Singapore said that “this shows very clearly the role to be played by the commercial lending sector” – but it may not be as simple as it sounds. There are still central bank restrictions on investing in Indonesia. While the country’s “ease of doing business” ranking has improved under President Jokowi’s rule, business is still often arduous.
“It can still take three to six months to get your final licence and start building, whatever your business is,” says Ricky Natapradja, the head of Euler Hermes’ Indonesian business.
Onshore borrowing can be restricted by pricing, collateral requirements and unwillingness to match the tenors large project finance deals usually require. International lenders, meanwhile, are sometimes put off by the accounting standards here.
The Indonesian government has been making some moves on the transport front, and developments in the power sector have been encouraging too. The Adaro consortium is expected to close finalising for the US$3.2bn Batang power project in Java, which will put two 1,000MW power plants onto the grid, by June.
48% of the finance comes from the Japan Bank for International Co-operation (JBIC), 32% from commercial banks and 20% in equity. The coal-fired station will offer the Adaro Energy Group the chance to burn some of its own supply, having been left high and dry by China’s snubbing of Indonesian coal.
Meanwhile, the Jakarta-to-Bandung high-speed rail project is seen as a statement of intent by the Indonesian government – but the statement may not be the correct one, Zimmer says. The US$5.5bn project is Indonesia’s first foray into high-speed territory and will be constructed by China Railway International, with China Development Bank providing 75% of the money.
But is this really what Indonesia needs? Local opposition has grown amid allegations of financial irregularities. And while projects such as these may suggest commitment to investment, they run the risk of becoming “lighthouses” – isolated pieces of infrastructure with no connection to, or reflection of, the real underlying need.
A commitment to mid-sized, pragmatic infrastructure projects would encourage more commercial financing, the LBBW banker said.
While the Asian Games, to be split between Jakarta and Palembang in 2018, may bring opportunity for infrastructure investment, such legacies can be tainted: just look at the white elephants dotted around Brazil, Korea, South Africa and Greece.
The opportunity for Indonesia, if managed carefully, is great. But infrastructure should not be viewed as a panacea for all of the country’s many ailments; rather a mere way of getting back on track.