Economy: Indonesia
by Fakhrul Fulvian (fakhrul.fulvian@bahana.co.id)
Energy and aviation investment incentives
On 21 December, Indonesia’s Economic Affairs Minister, Darmin Nasution announced the country’s eighth economic policy package, focused on promoting infrastructure development, specifically geographical mapping, aviation and oil refinery. Generally, we see these latest policies as having long-term implications, and thus do not expect a significant short-term impact. The details are as follows:
1. One-map policy: The government is planning to make a single, national geospatial map with a scale of 1:50,000. This one-map policy could foster regional border settlements, regional and infrastructure development programs, permits for land utilization and disaster mitigation. The map would be created using thematic geospatial data, which would be integrated to basic geospatial data.
2. Oil refinery development: The new policy provides fiscal and non-fiscal incentives for the acceleration of oil refinery development to extend the supply of domestic energy. New refineries will be focused in 3 regions, currently in Bontang and Tuban that would be integrated into the petrochemicals industry, which would add to government’s profit and narrow current account deficit.
3. Aviation MRO services: The government plans to accelerate import-duty permits by not making payments when spare parts for planes are brought into the country. The government also plans to develop domestic repair capabilities so that maintenance, repair, and overhaul (MRO) services can be developed and improved. With this, foreign airlines could possibly repair their planes in Indonesia.
Facing the low oil price environment
Even at the time of very low oil prices (21 Dec: USD36.4/brl, -35.4% ytd), we believe it is a good idea to provide government incentives for energy-related investments to reduce the country’s dependence on the global energy market over the long term, even though current low oil prices should reduce the attractiveness of the investments.
Recent news reports indicate that the Bontang oil refinery project is valued at USD25bn (IDR350tn) and is expected to commence operations in 2020 at 300k barrels/day. The Tuban project is expected to yield similar production capacity. If these expectations are accurate, we would look for a positive long-term impact from the investments.
That said, the low oil price environment should be a factor in considering whether Indonesia should pursue aggressive oil and gas investments. Our oil and gas analyst expects continued global oversupply conditions in 2016.
Deregulation should support medium-term economic prospects
Mr. Darmin said the government is planning additional incentives and deregulation policies in 2016, mainly in 5 industries: oil refinery, petrochemicals, steel, chemicals and pharmaceuticals. The eighth stimulus package represents the first of the deregulation incentives. In 2016, we look for deregulated sectors to see faster growth. We expect to see the effects of the current incentives in 2H16 at the earliest.