Indonesia: Building for transport

Several of Indonesia’s developmental priorities – promoting local industry, stimulating domestic consumption and improving infrastructure – have come into sharp focus in recent months, as the government attempts to temper demand and keep pace with growth. In an effort to suppress a bubble in consumer spending, the central bank has set a minimum down payment of 30% on new automobiles and 25% on motorcycles.

Bank Indonesia (BI), the central bank, issued the regulations on March 15, and they took effect three months later on June 16. In addition to setting minimum down payments for vehicles, BI capped housing loans at 70% of the value of the home.

As car and housing loans make up just 5% and 8% of the total loan volume, respectively, the regulations are unlikely to slow overall lending growth. However, BI stated that its intent was to mitigate a consumer credit bubble, which could force families to dip into their long-term savings. Both housing and auto loans have been growing at around 30% in 2012, higher than the overall loan growth rate of 24% in 2011.

Indonesia, meanwhile, has been seeing a surge in vehicle sales. Domestic car sales increased 16.9% in 2011, reaching a record 894,180 units sold. According to the Association of Indonesian Automotive Industries (Gaikindo), automobile sales were previously expected to hit the 1m-mark in 2012, and indeed, sales grew 28% in the first half of the year to 534,876 units.

However, the tighter restrictions have now taken some of the wind out of the industry’s sales, and Gaikindo revised its forecast to 875,000 units. Other industry players are more optimistic, forecasting sales between 920,000 and 950,000 units. Fuel subsidies, which are viewed as a crucial lifeline for the low-income segment of the population, have steadily increased in recent years, placing a greater burden on government coffers. Indonesia spent Rp165trn ($17.26bn) on fuel subsidies in 2011, a figure that is expected to rise to Rp216.8trn ($22.68bn) in 2012.

President Susilo Bambang Yudhoyono announced plans in late 2011 to scale back this subsidy, but Parliament voted down the bill in March after weeks of protests. The government has since shifted tactics and is now limiting access to the cheaper fuel to motorcycles and public transit vehicles.

Another important question for Indonesia is whether its infrastructure can keep up with such explosive growth in private car ownership. Congestion in Jakarta alone is estimated to cost the city around $3bn annually in fuel costs, health expenses and lost productivity. Years of underinvestment in infrastructure have helped precipitate the crisis; a new mass rapid transit system (MRT) for Jakarta is only just now getting off the ground. Land acquisition projects have been the biggest obstacle to the development of the MRT. A bill easing this process was signed in August 2012, following years of delay.

Construction on the first phase of the Jakarta MRT North-South line is expected to begin in the coming months, with the first phase of the MRT due by 2016.

Road development, meanwhile, lags significantly behind the growth of vehicle ownership, with the network expanding at a rate of 1% annually. There are a number of projects in the works that will help ease traffic congestion, including a 5.5-km elevated road in South Jakarta, which is expected to be operational by November. However, traffic problems throughout the country will continue to persist as the rate of construction lags behind the pace of sales.

Recent investments by Toyota, Suzuki and General Motors have highlighted the attractiveness of Indonesia as a location for automotive production, due to inexpensive labour costs and a burgeoning domestic market. While expanding automobile production is undoubtedly good for the economy, it is exacerbating infrastructure problems, which have long been Indonesia’s Achilles heel.