Indonesia Infrastructure: A US$250bn Opportunity - Morgan Stanley

We have published an in-depth report on Indonesia infrastructure, highlighting our view on the US$250bn opportunity in the space for the next 5 years.
This is quite literally a 101 – all you need to know on Indonesia Infrastructure in 101 pages.

MS ASEAN Economist Deyi Tan does a bottom up analysis of the infrastructure sector suggesting spending will accelerate over the next 5 years, shifting Indonesia's growth path by 2015. Her expectations are higher than the Government and consensus - essentially reforms have gained critical mass (think India in 2005) and the macro environment (cost of capital, external and government funding) is supportive.

Her report evaluates:
* Parallels with India and what has changed to facilitate infrastructure dollars
* Investment outlook and comparisons for 6 core sectors - electricity, telecom, roads, railways, air transport, ports

Deyi takes pains to dissect by sector, a snapshot of where we are, the trends, the obstacles, the reforms taken (what has changed and how effective it has been) .. all from an economics point of view.

Pls let us know if a call with Deyi will also be helpful


KEY SUMMARY

Conclusions: The bull story for Indonesia is now well known (See “Indonesia: Adding Another ‘I’ to the B-R-I-C Story” June 12, 2009). We think infrastructure spend is a key driver of this bullish outlook & an important source of positive surprise. Working from a bottom-up perspective & drawing insights from India’s experience, we expect +20% CAGR in infrastructure spend, totaling US$250bn over the next five years. This implies infrastructure spend will rise from 3.9% of GDP in 2009 to 5.9% in 2015, helping to push GDP growth to 7.2% by 2015. In our bull case, infrastructure spend could rise to 7% by 2015, lifting potential GDP growth to 8.0%. In the bear case, infrastructure spend stays at 4% and potential GDP growth at 6%.

How we differ: The government is more conservative than us, targeting +14%CAGR in 2009-2014, a total of US$203bn in infrastructure spend, averaging 5% of GDP each year. Our back-of-envelope calculations suggest consensus is likely factoring in only a mild rise in infra spend to around ~4.5% of GDP by 2015. Overall infra spend data is hard to come by. We estimate the headline number from bottom-up sources. We highlight that despite perceived slow reforms, infra spend has actually increased from 3.2% of GDP in 2005 to 3.9% in 2009. In our view, 2 factors will help support a faster pace of spend going forward:

1) Reforms gaining critical mass: We believe Indonesia is now where India was 6 years ago. India started its infrastructure reforms in 2000 but it wasn’t till 2005 that reforms gained critical mass & infrastructure spend began to accelerate. For Indonesia, 2005 marked the inflection point in reforms. Time was needed to implement these reforms & reforms are now building towards critical mass. Already, 17 important regulatory reforms have been passed. Some sector laws will be effective this year & next, and a new land acquisition law is in the pipeline in 2H11. Such reforms create the right micro environment for infra spend to pick up further.