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Economic Growth Doesn’t Happen Without Infrastructure, Indonesia Faces Development Issues

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February 22, 2012

JAKARTA (Dow Jones)–Indonesia needs to move quickly to expand and modernize its ports to keep up with a recent increase in exports and imports generated by the archipelago’s sustained growth, the country’s trade minister said Tuesday.

The country’s current ports are already overstretched and will become bottlenecks to further trade expansion if Indonesia doesn’t build better infrastructure, Trade Minister Gita Wirjawan told a group of reporters Wednesday.

Jakarta’s main port of Tanjung Priok, for example, needs to more than triple its container handling capacity in the next seven years, if it is going to keep up with expected growth in Southeast Asia’s largest economy.

“We have to ramp up our capacity or we are going to suffer,” he said.

Indonesia’s gross domestic product expanded 6.5% last year, its highest level in 15 years, and it’s expected to grow more than 6% this year, as the country’s increasingly-affluent middle class consumes more and high prices for coal, rubber and palm oil boost export receipts.

The growth is continuing despite slowdowns in the U.S. and Europe, and is now stretching the country’s outdated infrastructure to breaking point, economists and company executives say.

Chronic traffic jams clog the country’s cities while much of Indonesia has to deal with regular power outages. Backups at the many ports and on the highways and ferries of the sprawling archipelago mean that it’s often cheaper and faster to send a product from Jakarta to Singapore than to another city within the country.

To reduce the chances that overwhelmed ports don’t catch contaminated horticultural imports, Mr. Wirjawan said Indonesia next month will start asking that most imported fruits and vegetables be brought into the country and inspected at only four of its 14 ports.

While the produce that comes in by plane will be allowed in through Jakarta, the majority of the imports which come by ship through Jakarta’s port today will have to be diverted to other ports, such as far away Surabaya and Medan.

Some diplomats and importers complain this is a protectionist move aimed at blocking imports, but Mr. Wirjawan said the move is aimed at protecting the Indonesian consumer.

Bad infrastructure could also exacerbate inflation, economists have warned. Some are worried that Bank Indonesia, the country’s central bank, is getting ahead of itself and easing monetary policy too aggressively. The bank earlier this month surprised markets with a 25-basis point cut in its policy rate.

“Infrastructure constraints limit Indonesia’s growth potential and contribute to inflation by increasing transport, logistics and distribution costs,” said Deepak Gopinath, director of global market research at Trusted Sources, a London-based independent research company. “In eastern Indonesia, inflation is up to two percentage points higher than the national average, in part because of undeveloped transport infrastructure and high distribution costs.”

Last month, Indonesia’s inflation rate, as measured by the consumer price index, was 3.65%. It could rise as high as 7% in the next few months as high growth and bad infrastructure lead to higher prices, according to estimates by Trusted Sources.

Speaking to the Wall Street Journal, Mr. Wirjawan said that other than some upward pressure on rice and sugar prices, Indonesia’s inflation seems in check so far. Indonesia’s fiscal and monetary policy should help keep the country growing “without any seemingly real risk of inflating prices,” he said.

Another negative offshoot from Indonesia’s rapid growth recently has been labor unrest. Labor strikes across the archipelago have paralyzed everything from production at the mine of Freeport-McMoran Copper & Gold Inc. (FCX) to an industrial neighborhood near Jakarta. Workers across the country are asking for a bigger slice of all the new money the country is making.

Mr. Wirjawan, who is also the chairman of the country’s Investment Coordination Board, said that some foreign companies, particularly those from Korea and Taiwan, have threatened to move elsewhere if wages rise too high. But he expects unions, local governments and employers’ associations to come to agreements that will stop the strikes.

Despite some labor unrest, the country is so far on track to break last year’s record amount of close to $20 billion in foreign direct investment, he said. He said FDI this year will be 15% to 20% higher thanks to recent investment pledges, including South Korea’s Honam Petrochemical Corp.’s (011170.SE) plan to build a $5 billion complex in Indonesia. He said Korea’s Lotte group is looking at other investment options in Indonesia.

-By Eric Bellman, The Wall Street Journal

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