The outlook for Indonesia

Indonesia

Sacha Winzenried, energy utilities and resources leader of PwC Indonesia, talks to The Energy Year about the likely impact of the Covid-19 crisis and oil price drop on Indonesia's energy projects and ease of doing business. PwC is an international provider of assurance, business advisory, taxation and legal services.

This interview is featured in The Energy Indonesia Special Edition: Crisis and Resilience in the Covid-19 Era

From your perspective, how has the oil and gas industry been faring through this crisis?
There are two things to look at: the overall handling of the Covid-19 crisis and how that has directly impacted the energy sector. Clearly, like many other countries, Indonesia was struggling with which was the right approach to take and when was the right time to start putting in place procedures to try to curb the extent of the infection.
In an emerging economy like Indonesia’s, there are infrastructure issues when you deal with a crisis like this. There was a lot of work in the early stages to make sure that the hospitals were ready. They managed to build some new hospitals very quickly to just handle Covid patients in mid-March.
Then, soon after that in Jakarta, which was emerging as the epicentre of the virus in Indonesia because of the large population and the fact that it is much more connected with the rest of the world, they decided to effectively lock down. That happened much earlier than in other cities in Indonesia.
The unfortunate thing is that because probably more than 50% of the population in Jakarta is employed in the informal sector – they are working on the streets, or in small cafes, online delivery services, motorcycle taxis, etc. – when you have a lockdown situation where suddenly all of the people using those services are no longer on the streets, their income disappears.
You always have the risk that there is going to be a massive economic impact in a place like Indonesia. The government has worked quite hard to make sure that distribution of staple foods and money to those most affected was done quickly, but there were always going to be people that fall through the gap.
I think that the big question around this, outside of the medical and health issues, is the economic impact not just on the economy as a whole but on those individuals in the lower strata of society. That is what the government is most worried about. At the same time, the month of Ramadan for Muslims is usually the biggest economic time of the year because there are so many services, people are travelling back to their hometowns and there are tens of millions of people travelling around the country. That is the time of year when many businesses make a lot of their money.
That has effectively been cut drastically this year because of the restrictions on people’s movement. That also indirectly affects the energy sector, with the reduction in demand for fuel.

When do you think we will reach the peak of the economic fallout from the Covid-19 crisis?
We are seeing an economic impact now, particularly on small businesses, which are a big contributor to the economy. All of the small businesses – whether they are related to transportation, tourism or anything associated with those sectors – have been very heavily impacted.
When we look at large-scale business, such as the energy and mining or manufacturing sectors, I don’t think it has been as heavily impacted as it has been in other parts of the world. Very quickly, most of those industries were deemed essential services and the government allowed them to continue operations, with stricter protocols around health and safety.
What the real economic impact is going to be is a big question. Some analysts have indicated that Indonesia’s GDP growth in 2020 may drop from a 6% GDP growth rate expectation (versus last year’s 5%) to 2-3% or even zero. It is unlikely to be negative just because of the way the economy is structured. The question is how long that persists and whether there will be a quick revival as there has been in China, which is already starting to show signs of recovery.
Obviously, this has an impact on demand for oil and gas as well as coal and other energy sources, which has dropped off, together with prices. For Indonesia, which is a net importer of oil and gas even though it has a large upstream sector, we hear that the government has been trying to buy up stocks on the international market because with lower oil and gas prices it is a good time for them to secure supply.

Are we seeing the risk of large defaults in Indonesia, and in which sector are they most likely?
We haven’t seen that yet. It looks like the level of non-performing loans to the consumer sector may have increased, but we haven’t heard about big defaults by manufacturing or other sectors like energy or mining. The airlines and tourism sector have been hit hard. Garuda has been hit very hard. The government has already announced an equity injection so I don’t think anyone is expecting to see large-scale defaults.

In the energy industry in particular, this crisis has put a spanner in the works for a number of projects. What other major projects should we expect to see deferred, delayed or possibly cancelled?
If you think back to the large projects that we have seen identified in the last few years, the major ones that are due to come on line include Masela LNG, which is not yet at the plan of development (PoD) stage anyway, so it wouldn’t have been coming into construction stage this year.
Several of the majors, such as Repsol and Eni, have been looking to progress new gas finds in Indonesia. I would not be surprised if there was also some deferral in the timetable for these projects, as we are seeing around the world. I would guess that any large new projects could see deferrals, but we haven’t heard any formal announcements.

Do you think the Indonesian energy profile is poised to change in the next 12-18 months?
Although it depends on how long the oil price remains depressed, I can’t see any significant change in the structure of the industry here. Pertamina is still taking on new oil and gas blocks from the old expiring production-sharing contracts. It will continue to develop those. For several years there has been talk of developing more of the downstream sector in Indonesia, but the fact of the matter is that none of that has been funded or started construction.
There has been a plan to increase the refinery capacity in the country together with petrochemicals, but nothing has advanced far enough that we would see any big change in the short term. Those projects still need to go through financial feasibility studies; they need to get partners, and to be planned and developed properly. We are still probably looking at a timeline of several years.
It is likewise with the plans for development of LNG receiving terminals around the country. There was always a plan to use more LNG in the domestic market. Whatever projects were already in the pipeline are likely to continue. Overall, I think the biggest impact in Indonesia may be the deferral of large new upstream projects.

One of the positive impacts being discussed in Indonesia is that through the use of online tools and electronic approvals, we are looking at a potential destruction of red tape. Is this something you expect to happen?
In general, we are seeing much improved ways of doing business. Even at the tax office, there have been a lot of new regulations issued which help smooth the process for meeting obligations online and through other methods. All of the meetings that we had to spend a lot of time waiting for in offices or in traffic in Jakarta are much easier done online.
It seems like the government has taken that up very quickly as well, which is good. Hopefully, like in the rest of the world, this causes a change in culture. The pollution in places like Jakarta has been reduced a lot and I hear that the skies are much bluer these days, which is a good thing.
This can also drive some other good behaviours, for example, in the way transportation operates in Jakarta. The use of public transport and bicycles may increase, which would also be excellent for supporting the country’s energy demand as well, so that it is more evenly spread.
The low oil price, in a net importing country, also has some benefits. We see the mining sector, which is a big user of fuel, has lowered its cost structure at a time when the prices for commodities are under pressure, so some of them are able to maintain margins. That is a good side benefit of this as well.

Do you expect a wave of consolidation on the back of financial difficulties encountered in some of the sectors mentioned today?
Clearly globally we are going to see that and in particular in the US, in the shale gas industry and other places. In Indonesia, the sector is really made up of Pertamina, as the state oil and gas company, several large multinational players and some local players such as MEDCO, and none of them seem to be exhibiting serious financial difficulty at the moment. So I don’t think we are going to see a huge change in the way the sector is structured here.
There is potential for some of the oil and gas service companies to be struggling and we could see some consolidation there, whether that is in drilling or other parts of the industry, or with small players that are looking at exploration.

From PwC’s perspective, what changes have there been to the way you operate on a daily basis and what will it change in the long term?
As a service business, it is easy for us to go online and start working from home, much easier than for the oil and gas companies themselves. However, I am very thankful for the investment we have made over the last few years in our technology. I was one that was always questioning why we were investing so much, but it has become very evident that this has immediate payback now.
We are lucky that we were structured so that we could take advantage of that quite easily, and it has almost been business as usual. We have been hosting webinars with some of our clients on dealing with the cashflow issues of the Covid situation and what the new tax regulations are, how the government is helping and so on.
I have found that it is actually much easier and quicker to gather people to discuss these kinds of things than it was in the past. Your schedule becomes very full with meetings every day because people seem to arrange meetings at the drop of a hat. Instead of struggling to find time in people’s diaries, you seem to get everyone on the call. It has changed the way we work and hopefully it means we can reduce some of our office space and work more this way in the future.
A lot of companies are starting to think like that. I think it will be very good for the country and the government, because it has opened their eyes to the other ways of doing business that can be much more efficient.

Indonesian EPC contractors have told us their biggest difficulty was the uncertainty on the nature of the lockdown and the impossibility of calling force majeure on their contracts and being protected. What is your perspective on that issue and the shape of the lockdown for businesses?
There are lawyers debating whether the measures put in place by the government actually meet the requirements of force majeure under most of these contracts. It is not clear cut, depending on the way the contract is structured. Because Indonesia’s lockdown has effectively been localised, that also generates some questions.
However, business is clearly worrying about that. For some of these large projects that have been deferred, clearly that is going to cause issues for contractors that may not have the pipeline of work that they expected. There is likely to be some impact from that and some people are going to lose money, for sure. We have to see how that is going to play out.

How would you rate the reaction of the public authorities to the crisis?
Just like everywhere else in the world, there has been debate on what is the best approach to take. The thing I would give credit to the Indonesian central government for is that the economic response was very quick. They came out with a large stimulus package quickly. They gave a lot of relaxation on tax and other regulations under which companies have been able to defer tax and other payments and that is obviously very good for cashflows in this situation.
Everything has been focused on trying to ensure that companies don’t have to let workers go, that they don’t have to terminate large parts of the workforce. That side of things was done quickly and quite well. The big concern is for the bottom layer of society: whether the aid is getting to them quickly enough.
I am not qualified to talk about the response on the health side of the pandemic. Obviously, along with many other governments, they were walking a tightrope between strict policy and economic impact and they have tried to balance these two things quite well at the end of the day because we haven’t seen the massive outbreak that people were concerned about. The question is whether we are yet to see that. With the way Indonesia operates, people are taking responsibility for their own welfare to a large extent. Regional and small community groups are handling this quite well, so that also helps.

What should we be looking out for over the next few months as the lockdown eases?
Over the next few months we will watch how quickly demand comes back for basic commodities such as oil and gas, fuel for transportation and other activities. That is where we will start to see some signs of a return to normal. I would expect that similarly to China and some other economies, we will start to see some pickup towards the end of the year, and hopefully a more significant pick up in 2021.
Our economy is structured quite well: There is unlikely to be a large impact on the financial sector and government debt is still a very small percentage of GDP compared to many other countries, although they are prepared to increase that percentage for handling this crisis. So I think the economic impact can be handled quite well.
With the need for diversification of manufacturing and supply chains around the world that this pandemic has clearly highlighted, Indonesia is in a good position to take advantage of that and become a bigger player in manufacturing and regional supply chains so that countries such as Australia are not so heavily dependent on China. You even hear about US companies looking at other jurisdictions such as Indonesia for investment, so hopefully we will see something beneficial come out of this.

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