DENPASAR, Indonesia (24/11-14.29). The Nikkei Asia reported that the construction of new villas in Bali is defying the steep economic downturn that the coronavirus pandemic has caused for the tourist hotspot.
With around 60% of its gross domestic product derived from tourism, Bali’s economy has been the hardest hit in Indonesia by the COVID-19 pandemic. The country’s central bank reported negative growth of just under 11% for the province in September while the Ministry of Labor reports at least 80,000 tourism workers lost their jobs.
The effect on the island’s all-important accommodation sector has been devastating. Only 3% of Bali’s 130,000 hotel rooms are occupied while rental rates for the island’s 4,000 villas have been slashed by as much as 85%. The property market has hit a wall. “You can’t sell anything at the moment,” a prominent real estate agent told Nikkei Asia on condition of anonymity. In April 2020 the Australian ABC news reported a 95% drop in tourist numbers and a collapse of the economy. No surprise.
However, the building of new villas — mainly for people from Australia, Europe and the U.S. — appears to defy this calculus. Construction activity is most pronounced in the surf mecca of Canggu, where a property boom saw land values increase 40 to 50 times in the last 10 years. Some of these projects were started or conceived before the pandemic. But many are new projects commissioned by foreign investors.
“We are receiving more inquiries from expats living in Indonesia than ever before — people who out of the blue decided to invest. It has really surprised me,” says Baptiste Dufau of Bali Sandstone Consulting.
Manuele Mossoni, director of architectural company 2M Design Lab, says his “business has increased 20% to 30% compared to last year.” Terje Nilsen, director of Seven Stones Indonesia, a property consultant that caters to foreign investors, also reports an uptick in trade, stressing “This is our best business year in 15 years in Bali.”
Construction projects were started recently in the surf mecca of Canggu, where a property boom saw land values increase 40 to 50 times in the last decade.
Chief among market forces driving the phenomenon is investor confidence that Bali, which attracted 16 million visitors in 2019, is going to be more popular when COVID vaccines become available and travel resumes.
And now, we need to pull the handbrake. Despite the overly optimistic promises of wealth, beauty, beaches, the Hollywood versions of tranquility Bali, like the rest of Indonesia has a dark under-belly the all overly optimistic investment articles seldom cover. Epidemic corruption in particularly the police, and foreign property ownership.
According to the 2020 Gallup poll, more than 8 in 10 Indonesians say that corruption is widespread throughout the nation’s government and businesses.
The Gallup report suggests further that, during Suharto’s rule, the government and corruption were highly centralized at the national level, and costs associated with corruption were predictable. But the fall of the dictatorship led to decentralization of authority throughout the country, giving more power to local authorities. Instead of eliminating corruption, the article suggested, decentralization broadened the number of individuals seeking bribes and kickbacks.
….decentralization broadened the number of individuals seeking bribes and kickbacks…
The report goes on that despite the public opinion shows a trust in the police, higher educated Indonesians are lesser trustful of the police. And who can blame the public. Undocumented and extra-judicial arrests, extortion and ransom payments are widespread. Reports of collusion between police, prosecutors who are part of the police and not independent, judges and even appointed defense lawyers are widely known and publicized.
Even journalists are regularly targeted and only after pressure campaign by activists released. “If you do not have the connections like ordinary citizens and foreigners you have no recourse. Since 1998 the chances that you are extorted by police officials 9 out of 10 times higher than under Suharto,” says an long-time security analyst who wants to remain anonymous.
This is supported by the Gallup research and anecdotal evidence. In a string of extra-judicial arrests under the disguise of narcotics operations foreign and local youngsters were targeted under an over eager shot-to-kill order issued by the unpopular police chief. What is missed these raids yield little but are always seen as a way to make money. Sums as high as 50,000 dollars up to 150,000 dollars were reported.
Fadhil Hasan, a senior economist at the Institute for Development of Economics and Finance (Indef), said Tuesday the government needed to address corruption, inefficient government bureaucracy and improve access to financing to attract investment as the three issues were the most-concerning factors hindering investment. “[Corruption] is the most concerning issue that we face in attracting investment, especially foreign direct investment,” said Fadhil. “So this is one of the areas that the Indonesian government has to tackle with respect to attracting foreign investment.”
Indonesia managed to improve its score in the Transparency International’s Corruption Perception Index (CPI) to 40 out of 100 last year, an increase of two points from 2018. Unfortunately the rosy picture painted by the academics and experts does not reflect on the ground reality. Extortion is rampant to unprecedented levels exposing the ugly underbelly of the once promise land in Southeast Asia.
“How can we trust the police if the KPK is run by a cop”, said a prominent lawyer interviewed for this article, “Just ask how many police officers are really prosecuted for crimes of corruption, extortion, bribes? Unless the international community sanctioned the known individuals, nothing will change.” Tempo suggests that the changes of the KPK law further eliminates the independency of the once feared institutions. A quick google search of police officers arrested draws meager results.
He added like with human rights a sanction regime imposed on the government for not tackling corruption will get the attention. “Cancelling the preferred financial status, works. Lip service and political election slogans do not. Period.”, he added.
The Diplomat wrote that Jokowi has lost the war on corruption. The concerns of the international business community pale in comparison to the deep disillusionment amongst some of Jokowi’s most ardent supporters in 2014. The same voters who showed up en masse in 2014 and turned out in support of him and the KPK amid the early-2015 showdown with the police are now staging funerals for the anti-corruption agency.
Despite the peppy talks, years of foreign supported funding for the KPK it is merely a political tool many experts express. Police and judicial corruption are fueling the steady anger over Jokowi.
Bali, has consistently ranked among the most desirable post-pandemic travel destinations in the world by users of Booking.com, Trip advisor and other travel platforms. Bali has also topped the list of most-searched post-pandemic destinations by Indonesian travelers, according to travel platform Agoda, followed by Yogyakarta and Bandung in West Java.
However, Erin Cook of the Diplomat pointed out the blatantly obvious. ‘Indonesia has consistently underperformed in the ease of doing business index compared to regional neighbors, but slow efforts in recent years will get a huge boost if reforms go to plan’, she wrote. But many argue Indonesia since the downfall of the Suharto regime has not delivered as expected.
Last October, economic data from across the region showed Indonesia trailing Vietnam leading the regional bounty amid the U.S.-China trade war. Indonesia failed to pick up much in the way of firms shifting manufacturing out of China, a point that angered the president and renewed his zeal for reform. This sentiment has long been ugly truth of Indonesia, an expert on Indonesia told us. ‘The economic power, the enormous cultural, resource and historical wealth of the country is again, and again, squandered away’, he added.
‘Despite brash announcement on reforms the focus on fighting corruption the public, investors and foreign observers remain highly skeptical about real change. Has anything actually changed since 1998? ‘. Most of the old hands say no.
A 2019 study shares this view. John Quah wrote, ‘Police corruption is widespread in Indonesia because of the inadequate budget allocated to the police, police officers are paid low salaries and recruited and promoted on their ability to pay bribes instead of merit, corrupt police officers are not detected or punished.’
Insiders argue the Indonesian police has more than sufficient funding. ‘Flashy cars, opulent weddings, fat bank accounts are well documented and reported in the media but little has changed.’ a expert from the University of Indonesia claims.
Opportunity abound the police, once media darling has long lost the glitz of the counter terror successes. The everyday Indonesian and foreigners alike run daily a gauntlet of police corruption, extortion and ‘fees’ to help. The recent widespread riots shown repeatedly how quickly the public opinion can sour making the police the least popular branch of government.
Experts warn the euphoria of a changing nature of office work during the pandemic is another factor projected to boost demand for luxury housing in Bali. But, corruption, bribes and a grumbling infrastructure, despite the flair for the ‘rustique’ still represents investment risks.
A survey commissioned by The Straits Times in Singapore found eight of 10 workers prefer working from home, while a survey by BBC’s Future Forum found only 12% of respondents want to return to full-time office work.
“After the lockdowns, a lot of people have figured out it’s better living in Bali than in Melbourne or Hong Kong,” says investment consultant Nilsen. “I think we are going to see a massive rise in the number of people coming here, and it will be different from the tourist market of the past [driven by people] who came here for a few days or weeks. They will be residents with long-term commitments.”
Nilsen is also receiving a high number of inquiries for villas and office space from companies planning to relocate to Bali. “Previously the ‘digital nomads’ movement in Bali was dominated by professionals working in hospitality and IT, but now the proposition is attracting a much wider spectrum of businesses,” he explains.
“Our newest client is a radiology firm that interprets X-rays online for hospitals all over the world and they want to sit down and do it in Bali. We are also hearing rumors that some big tech companies are going to move their headquarters here because they can find access to a good pool of local and expat talent.”
Numbeo, the world’s largest cost-of-living database, ranks Bali as the 370th least expensive place to live out of 589 ranked cities in the world. It places the cost of living for a single person, excluding rent, at $594 a month or $2,097 for a family of four.
David Sutcliffe, a former fund manager from the U.K. who’s worked remotely in Bali since 2016, believes the quality of life on the island is without par.
“The lifestyle here is unparalleled. The private schools are good, there’s lots of expertise for startups, people are constantly building innovative and interesting businesses, there are great restaurants, leisure and travel opportunities, the weather is always nice,” said Sutcliffe, now a cryptocurrency investor.
He adds that the Indonesian government is making it easier for foreigners to establish themselves. “The recent slew of new laws and regulations, known as the Omnibus Bill, is a signal to investors of the business-friendly direction this country is going in the long-term.” However, many Indonesians do not share this view.
Having rented for years, Sutcliffe, who plans to make Bali his home for the foreseeable future, is now building a villa of his own. “If I was to compare it to what I could get back home, there is no comparison. For about $300,000 — less than the price of a small two-bedroom flat in Greater London — I can build a family home with a tropical garden and swimming pool 500 meters from the beach and 10 minutes scooter ride from the central business district,” he says.
“It will be my primary residence, not a rental business. But I also consider it a solid vehicle for my wealth because I believe people and investors are going to be drawn to Bali for many years to come.”
Architect Mossoni told Nikkei that discounted construction costs are another reason expats like Sutcliffe are now building villas. “The price of some raw materials like wood has gone down because suppliers bought so much last year when they were able to charge two to three times the real value [in Bali]. But now they are willing to come back to the prices of five or six years ago to maintain cash flow,” he explains.
Ironwood, an indigenous hardwood used for decking in Bali, is a textbook example. At the start of the year, it was $57 per sq. meter. Now it is being offered for $32 to $42. Suppliers of imported kitchen and bathroom tapware are holding clearance sales with up to 60% off, while furniture and electrical goods stores are willing to negotiate on just about anything.
There is also a much bigger pool of labor for construction, with contractors offering some discounts compared to previous years thanks to low demand for construction all over Indonesia.
Indonesia fell into recession for the first time in two decades. The country’s real GDP plunged 3.49% in the three months ended September from a year earlier. The slowdown follows a 5.32% contraction in the previous quarter, plunging the archipelago into a recession — defined as two consecutive quarters of negative growth.
The cost of buying or leasing land, which has fallen 10% to 15% is also incentivizing builders. “Last year land prices in Canggu reached a point that it was no longer profitable for anyone and the bubble burst,” Mossoni says. “But developers are willing to invest at this crazy moment in time because they are certain the market will go up again.”
Dufau of Bali Sandstone Consulting agrees: “I think in the next two or three years land prices will pop up again the same way they did after the terrorist bombings [of 2002 and 2005] and the Mount Agung eruption [in 2017]. As the pandemic is over, people will be rushing in.”
Although the attractions of the promise land are present many pose the question is the country ripe for a change? ‘Unless the police corruptions is tamed, unless avenues are open for grievances effectively and quickly addressed by the police themselves and corrupt or abusive officials are cast out from police, Indonesia will remain stagnant and considered a high risk investment environment.’, a Risk Consultant in Dubai said.
‘Investors, small and big, have choices. Invest in Dubai, the new European countries, even Africa and South America provide better and safer returns on investments.’, he said. ‘The corruption is clearly hampering the post Covid-19 investment climate.’
‘If a police is viewed as a the enemy of the people, as seen in the US last summer, why would anyone park 300,000 dollars in a place that does not even allow foreign ownership and protects corrupt cops?’ Good point.