JAKARTA: The rupiah’s depreciation has begun to weigh on Indonesia’s infrastructure push, with contractors warning that rising import costs could disrupt progress in several National Strategic Projects (PSN), particularly those heavily reliant on imported materials and equipment.
The Indonesian Contractors Association (AKI) said the depreciation of the rupiah against the US dollar had directly increased construction costs for projects that depend on imported inputs like steel, bitumen and heavy machinery.
“Contractors whose contracts are rupiah-based but whose cost structure is 30% to 50% imports, will experience margin pressure,” Djoko told Bisnis on Wednesday.
He pointed to the ongoing construction of the trans-Sumatra toll road as an example of a project vulnerable to exchange-rate volatility, saying the rupiah’s depreciation could hamper cash flow and slow construction progress.
Projects still in the planning or early implementation stage, such as the Giant Sea Wall project, risk facing higher upfront costs as imported construction materials become more expensive.
“The weakening rupiah is a test for project risk management. If mitigation measures are implemented properly, PSNs can continue without significant delays.
The key is intensive coordination between the finance ministry, the public works ministry and business players,” Djoko said.
To cushion the impact of the rupiah’s decline, the Aki urged the government to prioritise mitigation measures, particularly for projects with high dependence on imported materials.
The association also called for faster adoption of domestic components to reduce reliance on imports.
It also recommended that the government considers hedging mechanisms or multi-currency payment schemes for strategic projects with large import content, so that exchange-rate risks would not be borne entirely by contractors.
In addition, the AKI urged authorities to regularly update price-adjustment formulas in PSN contracts to better reflect current market conditions and rising construction costs.
Lastly, the association emphasised the importance of maintaining budget certainty by prioritising projects with high multiplier effects, including the trans-Sumatra toll road and housing developments.
“The weakening rupiah is not a reason to stop PSNs, but rather a moment to strengthen risk management and the independence of the domestic construction-material industry,” Djoko added.
Economists have also warned that the rupiah’s depreciation could have broader implications for the manufacturing sector and employment.
Esther Sri Astuti, executive director of the Institute for Development of Economics and Finance, said industries that still relied heavily on imported raw materials were vulnerable to exchange-rate fluctuations.
According to Esther, a weaker rupiah could lead to rising production costs, imported inflation and slower business expansion, which in turn could threaten employment and job creation.
“The condition directly affects the labour market through swelling production costs, imported inflation, the threat of layoffs and weaker labour absorption due to delayed business expansion,” she said, as quoted by news agency Antara.
To mitigate those risks, Esther recommended that companies strengthen the use of hedging instruments to protect cash flow from foreign exchange fluctuations.
She also encouraged businesses to seek partnerships with local suppliers as alternatives to imported raw materials, despite acknowledging the challenges involved in building domestic supply chains.
In addition, Esther urged companies to tighten operational efficiency through cost-cutting measures, including rationalising capital expenditure and optimising working capital without sacrificing quality.
She further suggested that businesses expand the use of local currency settlement schemes in international trade transactions to reduce dependence on the US dollar. — The Jakarta Post/ANN
