13 November 2018

2018 Infrastructure Forum: Investing in Indonesia’s Growth Ambitions

BKPM-HSBC Infrastructure Forum, themed “Towards Indonesia 2045” was held in Bali on 11 October 2018.

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BKPM-HSBC Infrastructure Forum, themed "Towards Indonesia 2045" was held in Bali on 11 October 2018. The business forum was hosted by HSBC and the Indonesian Investment Coordinating Board (BKPM), explored investment opportunities, financing strategies and collaborations to realise Indonesia's growth ambition towards 2045.

Deputy Chairman and Chief Executive of HSBC Asia Pacific, Peter Wong, in his remarks mentioned that Indonesia is currently the world's 4th most populous country, the largest in ASEAN and contributes to about 40% of ASEAN GDP and highlighted the importance of infrastructure development to fully support Indonesia's growth. Current challenges cover financing gap which requires the collaboration of public and private sectors; the need for strong legal framework for infrastructure projects; and the necessity that all infrastructure have to be sustainable and structurally resilient.

Thomas Trikasih Lembong, the Chairman of the Indonesian Investment Coordinating Board (BKPM) in his keynote speech reiterated on the importance of infrastructure finance. Excessive public financing of infrastructure projects might lead to the need for privatization. Highlighting the need of transformational shifts from il-liquid to liquid, debt to equity and working class to middle class, he also mentioned the capital market's preference to turn infrastructure assets into liquid trade-able instruments. It is urgent for policy makers to start leaning towards infrastructure instruments as an alternative form of yield-generating instruments.

As part of the forum, a panel discussion was held, featuring Bank Indonesia's Deputy Governor, Sugeng; OJK's Chief Executive of Capital Markets, Hoesen; and Former Minister of Finance, Chatib Basri.

Central Bank's Deputy Governor, Sugeng mentioned that long-term infrastructure is required to support long-term growth - and there are three aspects of new paradigm to push higher growth; first is the shift from the government funding to private funding; second, the consideration of infrastructure project as an asset class; and third, the presence of broad-based investors with the support of hedging instruments for long-term funding.

According to Sugeng, in terms of foreign exchange (FX), Bank Indonesia provides FX swaps at low prices (including FX swap for managing banking liquidity and FX swap for hedging), to further boost market interest. The central bank has also developed Indonesia Overnight Index Average (IndoNIA) which is intended to serve as the overnight money market benchmark rate, to replace JIBOR by January 2019.

Meanwhile, OJK's Chief Executive of Capital Markets, Hoesen, emphasized the strategic role of capital market to assist the Private Sector in developing infrastructure projects. According to Hoesen, the required funding to develop infrastructure projects in the period of 2015-2019 had reached IDR 5.5 trillion; as much as 50% are covered by state budget/APBN. Other financing resources to include the State-Owned Enterprises (19.3%), and Private Contribution (30.7%). Capital market products, among others, in the form of shares, bonds and sukuk, private funds, infrastructure funds, real estate investment trusts, and asset securitization.

Hoesen also mentioned that capital markets optimization needs to be supported by both parties, from supply side, namely the addition of the number of IPO companies and the issuance of investment products for infrastructure projects. While on the demand side, an increase in the distribution of capital market products and in the number of investors.

According to Hoesen, the next three crucial steps are; first, to educate potential investors and private companies on the range of capital market instruments as a source of financing; second, to cooperate with the Ministry of Finance to provide tax incentives for related instruments of infrastructure project financing; and third, to encourage long-term institutional investment to finance infrastructure projects through various capital market instruments.

By 2045 Indonesia is projected to become the fourth largest economy in the world. Former Minister of Finance, Chatib Basri, discussed on the risk for Indonesia to grow old without becoming rich, as the country is on a 5% growth rate.

He added, Indonesia's economic growth have to reach more than 6% to realize Indonesia's ambitions. This can be achieved by increasing productivity and efficiency. Key factor that can accelerate economic growth are structural reforms, including open economy, export diversification, infrastructure, quality of human resources and governance.

It is also deemed important for the Government to focus on projects which are not commercially viable, and let those be handled by the private sector.

In terms of attracting foreign funds into the country, options are foreign investments or loans, therefore development sectors should be opened up for foreign direct investments. Technology, particularly digital technology, also plays an important role in financial inclusion efforts to mobilize funds.

The former minister further expressed that economic growth cannot be traversed without disrupting macro stability. The existence of digital technology can help this to grow, followed by investment in human resources on vocational training and political management. Basri also highlights, to support this growth, the government must continue to improve not only in terms of policy, but also to focus to commercially viable projects.

The event brought together infrastructure stakeholders, investors, financial institutions, engineers, and construction firms from various countries and was held in line with the IMF-World Bank Annual Meetings.

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