Indonesia Set to Fast-Track Infrastructure Spending

Indonesia 12 May 2015
Indonesia Set to Fast-Track Infrastructure Spending

Jakarta. Could construction stocks be the next top picks in Indonesia’s equity market? Given the government’s intent to fast-track infrastructure spending after a report on Tuesday showed weakness in the economy, they could be.

Gross domestic product rose 4.7 percent in the January-March period, which was the weakest performance since the third quarter of 2009, as exports declined and the rupiah’s depreciation against the US dollar raised costs. Since the data were released, state officials have been quick to say that they would fast-track spending in the state budget on infrastructure projects in a bid to quickly boost economic growth.

Bank Indonesia forecast that the economy will pick up in the second quarter as government spending for programs, in particular infrastructure spending, increase. State-controlled lender Bank Mandiri said last week that it approved Rp 9 trillion ($692 million) in infrastructure loans in the January-April period, with the goal of at least Rp 36 trillion in loans to be used by state-owned enterprises on their projects for the entire year. The Public Works and Public Housing Ministry said on Thursday that it plans to spend 30 percent of its budget in the second quarter in order to accelerate infrastructure development.

Some investors and analysts are giving the construction sector a second look, given the latest flurry of activity to proceed with building projects.

“The recent weakness in the construction sector has largely stemmed from the the lack of infrastructure announcement that was promised by the new administration,” said Bharat Joshi, investment director at Aberdeen Asset Management in Jakarta, which manages about Rp 2 trillion in Indonesian equities and bonds.

“We have seen some piecemeal announcement but nothing significant that would lift the sentiment for the construction sector,” he added. “However, there was too much optimism that drove these companies higher. But now investors are becoming more realistic of the issues and development at hand.”

Most construction stocks are down sharply for the year. Adhi Karya has fallen 17 percent, while Wijaya Karya Persero has fallen 16 percent. By comparison, the benchmark stock measure, the Jakarta Composite Index, has lost 0.9 percent. The Jakarta Property Index, a basket of 64 stocks in the property development and construction industries, has risen 11 percent, largely on the back of gains in property shares.

“In terms of price, it is a good time to collect construction stocks since prices are at a discount,” said Guntur Hariyanto, analyst at credit rating agency Pefindo.

“First-quarter realization [on insfrastructure spending] might have been disappointing, but we’re looking beyond that,” he added. “There is still some potential that the government will realize planned construction projects through the end of the year, especially as they’re faced with the unsatisfactory results from the first quarter. If the government can start the projects soon, there is hope for growth in the second quarter.”

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Big run in past few years

Still, construction stocks have had a big run in the past few years. Adhi Karya’s stock ended at Rp 2,900 on Friday, up more than fivefold from its Rp 580 close at the end of 2011. President Susilo Bambang Yudhonoyo announced in May 2011 an ambitious program to boost economic growth by detailing plans for the development of areas such as eastern Indonesia with the construction of seaports, roads and power plants.

“Basically, implementation has been slow. This places a big impact because most construction projects depend on the state budget,” Guntur said. “There were high expectations that the government will push construction to the fullest, but in reality, that hasn’t been fully realized. There were many projects on hold in the first quarter since the state budget was just finalized.”

Increasing infrastructure development is part of President Joko Widodo’s plan to help push Indonesia’s economic growth back to an annual 7 percent rate.

Vice President Jusuf Kalla sent out a message last week that the government is trying to put the economy on track to faster growth. On Thursday he gave a prediction that the economy would expand at a more than 5 percent clip in the second quarter on the back of higher state spending on public projects. Kalla also expressed optimism of reaching the government’s goal of 5.7 percent growth this year.

There remain challenges for this administration, such as whether the government can increase tax collection to help finance infrastructure projects and other programs.

“There clearly are concerns on the investors’ side on infrastructure plans for Indonesia,” said Jahanzeb Naseer, head of research at Credit Suisse Securities Indonesia. “Recently, these worries have been driven by the view that the government’s revenue collection targets are too aggressive and will be missed.”

Jahanzeb pointed out that construction stocks could rally if the government does show that it has been spending on infrastructure projects.

“If Bank Indonesia does not cut interest rates in the near future then the only avenue for economic growth is through fiscal spending and a big part of that is infrastructure spending,” he said.

“First-quarter’s numbers would make it an even more urgent case for boosting the disbursements and ensuring higher spending. The clear beneficiaries of that are construction stocks. So in an economy that is generally weak, this sector is likely to show strong growth in second half and in 2016.”

GlobeAsia

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