Indonesia should not to rely on infrastructure sector alone. The government needs to diversify its economic powerhouse by driving growth in the fishery, tourism and manufacturing sectors.
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Business district in Jakarta. Donang Wahyu|KATADATA

KATADATA - President Joko Widodo has stepped up government spending on development programs since early 2016. A number of infrastructure projects are currently underway. Tender processes, such as for the construction of a 70-km toll road, started at the end of last year. The Directorate General of Spatial Planning and Development is currently constructing land infrastructure worth IDR 14 trillion in five cities.

Several other ministries are doing the same. Finance minister Bambang Brodjonegoro said that, as a result, government spending as of February had reached IDR 251.5 trillion, or 12 percent of its target of IDR 2,095.7 trillion. Of that amount, the government’s capital expenditure has exceededIDR 5 trillion or 2.5 percent of the planned IDR 201.6 trillion. This actual expenditure is quadruple the IDR 1.3 trillion spent the same period last year. (Read: ADB to Fund Part of Infrastructure Projects).

The government's efforts to boost infrastructure projects were applauded by the international community. The Asian Development Bank (ADB), for instance, announced that Asian growth will be led by Indonesia as it ramps up investment in infrastructure. That is why the Asian financial institution has predicted that Indonesia’s economy could grow more than five percent this year. Its two major drivers are government investment and household consumption.

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ADB’scountry director for Indonesia Steven R. Tabor said that such efforts will help Indonesia’s economy become a leader in the Asian region, which will result in a strengthening of the rupiah. In addition, foreign direct investment (FDI) flowing into Indonesia, particularly from China, in the first quarter has also increased. (See also: Government to Rely on 30 Infrastructure Projects Amidst Economic Slowdown).

In his analysis, there are two factors behind the increase in actual Chinese investment in Indonesia compared to previous years. First, Chinese industry is experiencing over capacity. Second, business prospects in Indonesia are starting to recover. "There is capital outflow from China, and then there is capital inflow to Indonesia. This is the highest level of investor interest in Indonesia's history," said Tabor at the Asian Development Outlook at the Intercontinental Hotel, Jakarta, Wednesday (30/3).

However, Tabor advised Indonesia not to rely on one sector alone. The government needs to diversify its economic powerhouse by driving growth in the fishery, tourism and manufacturing sectors. In the tourism sector, China is also a potential market for Indonesia. ADB data indicates that China issued 30 million new passports this year. The Indonesian government should be able to capitalise on this. "They're already bored with Hong Kong. Where are they supposed to go? We should capitalise on this," he said.

The growth of the tourism sector in Indonesia is nothing short of fantastic, according to Tabor. Social issues, even security, did not discourage tourists from coming to Indonesia. For example, following the blasts and shootings in Sarinah,Jakarta, mid-January, did not stem the flow of tourists arriving in the country. As a result, investment in the tourism sector, such as hotels, continues to grow. (Read: Arabian investors Eye Mandalika and Tanjung Lesung Tourism Areas).

Emma Allen offered a similar opinion. The ADB’s economist for Indonesia said that the government could drive the tourism and e-commerce sectors. Emma explained that the contribution of tourism sector to GDP was 4.2 percent in 2014. This figure is expected to increase to five percent this year, and eight percent in 2019. Revenue from this sector is also expected to increase, from IDR 134 trillion in 2014 to IDR 172 trillion and IDR 240 trillion in 2016 and 2019, respectively.

Predictions that Indonesia will lead Asia’s growth are justified. Economist at Bank Central Asia (BCA), David Sumual, said that although Indonesia still lags behind Vietnam, India, China, and the Philippines, the country’s acceleration has improved. The other four countries are experiencing a slowdown. Vietnam’s economic growth, for example, is down from 6.4 percent in the fourth quarter of last year to 5.4 percent in the first quarter of this year.

Conversely, he predicts that Indonesia’s economy could grow by 5.1- 5.2 percent in the first quarter of 2016, or higher than the previous quarter’s growth of 5.04 percent. "Indonesia's economic growth is still relatively strong. China is slowing down. Thailand, Malaysia, Singapore, and the Philippines are slowing down too. Meanwhile,Indonesia is accelerating," David told Katadata.

In terms of investment indicators, ADB's senior economist for Indonesia, Priasto Aji, said that the increase in the government’s capital expenditure on infrastructure will boost the economy. His data showed that the government investment is increasing, and he is confident that infrastructure spending will be higher this year. After all, half of the infrastructure spending target has already been met.

"We are fully aware that oil and gas revenue will fall. But tax collection has begun to improve. We estimate that the budget deficit could be 2.8 percent of GDP," he said. (See also: Government to Speed Up Debt of IDR 63 Trillion to Build Infrastructure).

Despite lower revenue and accompanying non-priority budget cuts, Priasto is confident that the economy will grow 5.2 percent this year. Government spending will boost private investment in the second half of 2016 on the back of lower lending rates and an improved investment climate. Big budgets will be channelled in the form of state capital participation to state-owned enterprises. Private investment, meanwhile, has been on the rise in all sectors,except mining, since October 2015.

Household consumption has also risen since the start of the year, driven by a fall in fuel prices resulting in lower inflation. For that reason, Priasto is confident that the people's purchasing power will improve. This is in contrast to household consumption last year which continued to decline throughout the year, from 5.0 percent in the first quarter to 4.92 percent in the fourth quarter.

He added that net exports continue to slide, albeit by less than in previous quarters. Diversification is needed to boost the country’s exports, in particular by improving service exports in the tourism sector.

Given the latest figures, Bambang Brodjonegoro is confident that the economy will improve in the first quarter. Capital expenditure as of the third week of March was IDR 8 trillion, and he expects household consumption to improve too. "The first quarter was slow, but it will pick up. High levels of government spending generally stimulate private sector investment,” said Bambang.

Desy Setyowati