Construction

The construction sector in Indonesia has been a growth driver in the past few years. Thanks in large part to the current administration’s infrastructure drive, the Indonesian construction industry registered an annual growth rate of 5.8% in real terms in 2019, slightly above the national growth rate of 5.02%.  


As part of this larger infrastructure initiative, the construction industry has further contributed significant economic benefits. According to data from the Ministry of Public Works and Housing (PUPR), infrastructure investment in 2018 rose to IDR 157.8 Tn (roughly US$11.3 Bn) from IDR 216.8 Tn in the previous year. Respectively, according to the same data, infrastructure investment contributed 1.28% to the overall economic growth with an added value of IDR 184.4 Tn in 2018, which is an increase from the 1.06% contribution towards economic growth with an added value IDR 146.9 Tn in 2017.

 

These investments have gone into quite a number of infrastructure projects. As of the end of 2019, these include:

  • The construction of 61 dams
  • 3,843.38km of new public roads
  • 58km of new bridges
  • And 1,298.49km of toll roads
     

Concurrently, these infrastructure developments have propped up the country’s competitiveness. Indonesia has risen from rank 72 in 2014 to rank 60 in 2019 in the Quality of Roads category within the World Economic Forum’s Global Competitiveness Index, of which Indonesia is ranked 50 out of 141 countries. The same improvement is also seen in the World Bank’s Logistic Performance Index, in which Indonesia is ranked 46 out of 161 countries in its 2018 report, up from 53 in 2014.

 

In 2020, as in other industries, the construction industry took a significant hit from the COVID-19 pandemic. The Indonesian construction industry's output in 2020 declined by 2% in real terms due to the country’s large-scale social restriction policies. According to the Central Statistics Agency (BPS), the country's value-add declined by 4.5% year on year (YoY) in real terms in the third quarter of 2020.

 

However, the industry is expected to recover in 2021, with annual growth projections ranging from 5 to 7% among various consultancy firms. This is due to the rollout of the national government’s vaccination program, the reallocation of state funds to major infrastructure projects from COVID-19 mitigation programs to economic recovery programs should the situation from the pandemic normalizes, as well as in consideration of the sector’s stable outlook.  

 

A major project on the horizon is the relocation of the Indonesian capital city from Jakarta in Java to East Kalimantan. The cost of the project is officially estimated at $33 billion and will take a decade to complete. In terms of funding, the Indonesian government has recently launched a Sovereign Wealth Fund dubbed Indonesia Investment Authority (INA) to draw more foreign investments for its infrastructure drive, among other national development plans. To this end, the Indonesian government will be injecting over 5 billion into INA over a certain period. Meanwhile, a number of countries, such as the US, Japan, and Canada, have expressed interest in investing via INA.  

 

 

HIGHLIGHTS

 

Highcharts.com

 

The government has budgeted a large amount for infrastructure spending in 2020. Ministry of Finance data shows IDR423.3 trillion budgeted for infrastructure development in 2020, 5.9% higher than IDR399.7 trillion in 2019. (Source: Ministry of Finance; Graph Courtesy of Statista)

 

 

Realized direct investment in the construction sector was IDR 28.0 trillion in the first half of 2020, according to data from the Investment Coordinating Board (BKPM). Of the total investment realization in 1H2020, IDR 26 trillion or 92.7% of the total was domestic direct investment. Foreign direct investment accounted for the balance of IDR2 trillion. (Source: BKPM; graph courtesy of Indonesia Credit Rating Agency PEFINDO)

 

Revenue by Listed Building Construction Companies* (IDR Trillion)

 

Company 2018 2019 Share*
Waskita Karya (Persero) Tbk 48.789 31.387 20,60%
Wijaya Karya (Persero) Tbk 31.158 27.213 17,90%
PP (Persero) Tbk 25.120 24.660 16,20%
Hutama Karya (Persero) 36.748 26.391 17,40%
Adhi Karya (Persero) Tbk 15.655 15.308 10,10%
Jaya Konstruksi Manggala Pratama Tbk 5.157 5.471 3,60%
Wijaya Karya Bangunan Gedung Tbk 5.823 4.568 3,00%
Surya Semesta Intermusa Tbk 3.682 4.006 2,60%
Acset Indonusa Tbk 3.725 3.947 2,60%
Nusa Raya Cipta Tbk 2.457 2.618 1,70%
Total Bangun Persada Tbk 2.783 2.475 1,60%
Indonesia Pondasi Raya Tbk 920 958 0,60%
Nusa Konstruksi Enjiniring Tbk 1.024 922 0,60%
Superkrane Mitra Utama Tbk 561 682 0,40%
Totalindo Eka Persada Tbk 1.458 681 0,40%
Paramita Bangun Sarana Tbk 359 608 0,40%
Cahayasakti Investindo Sukses Tbk 31 68 0,00%
Lancartama Sejati Tbk 57 41 0,00%
Total 185.507 152.004 100,00%

 

Source: Company's Financial Statements

 

Indonesia’s construction industry is saturated with hundreds and thousands of companies, many of which are small- and medium-sized contractors. State-owned construction companies have a strategic position in the competitive landscape.  

 

 

CHALLENGES

 

Based on projections by the BPS, Indonesia’s population will grow to 284 million people by 2025, with a majority of the population still centralized in the island of Java with 158.7 million, followed by Sumatra with 62.8 million, Sulawesi with 21 million, Kalimantan with 18 million, Bali and Nusa Tenggara islands with 15.9 million, Papua with 4.7 million, and the Maluku islands with 3.3 million. Meanwhile, more and more Indonesians are expected to be drawn into cities with 60% of its people fully urbanized in that same period. This high rate of urbanization calls for a rapid and adequate infrastructure development.

 

Due to Indonesia’ geographic situation as an archipelago situated in the Pacific Ring of Fire, the monumentality of the task of providing adequate infrastructure cannot be understated. Natural disasters, a problem further exacerbated by climate change, poses a risk to any potential investors of Indonesia’s construction sector. Data from the National Disaster Mitigation Agency (BNPB) shows that since from 2015-2018, Indonesia has had to deal with 7,996 national disasters such as floods, landslides, hurricanes, droughts, forest fires, earthquakes, tsunamis and volcano eruptions.  

 

The most recent and ongoing national disaster that is the COVID-19 pandemic may be counted among them. Indonesia Credit Rating Agency (PEFINDO) sees a weaker outlook for the construction industry, with the real sector’s contraction reducing demand for construction services due to the pandemic. Project delays also weigh on growth prospects in the short term. Growth in construction sector services is closely related to the real sector. Indonesia’s economic growth contracted 5.32% YoY in 2Q2020 after a positive 2.97% YoY in 1Q2020, according to the Central Statistics Agency. Cumulatively, economic growth contracted 1.27% YoY in 1H2020, with the construction sector contracting by 1.26% YoY in the same period.  

 

The same prospect is expected in regards to the demand for construction services from the property and real estate sector as indicated by lending activities by banks. Bank Indonesia data shows that loans to the property sector grew by 4.0% YoY as of May 2020 to IDR 1,025.6 Tn and the percentage of growth was significantly lower compared to the same period in the previous year (17.3% YoY). Deteriorating economic conditions make buyers postpone spending decisions. Loan growth for residential property purchases slowed from 13.4% YoY in May 2019 to 2.7% YoY in May 2020 (to IDR 501.4 trillion).  

 

 

CONCLUSION

 

Indonesia has been projected to be a high-income country with the fifth largest GDP globally by 2045. Its rapidly urbanizing population will continue to drive demand in the construction sector as long as the country remain politically stable. If the last three national administrations are of any indication, there is little evidence to suggest that the political situation in Indonesia will become unstable anytime soon.

 

The short-term risks, such as that incurred by the COVID-19 pandemic, is still outweighed by the long-terms prospects. Late in 2020, the government revealed that infrastructure spending in 2021 will be in the IDR 417 Tn mark – still higher than the budget at the pre-pandemic level. This shows the government’s commitment to providing infrastructure for the country’s ever-growing population. The ongoing COVID-19 vaccination program should further provide optimism among investors anticipating a return to normalcy in the country’s construction sector.  

 

Overall, the condition of the construction sector in Indonesia remains solid with a strong growth prospect that is anchored by low inflation, political stability, good credit rating and prudent macroeconomic policy. What remains is to gain a proper insight into the market and its various niches. In this regard, investors are advised to seek experienced local partners with a well-established network who can give them the upper hand in Indonesia’s highly competitive construction landscape.

 


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