Indonesia to Shift Capital to Borneo From Sinking Jakarta

The world's largest archipelago is moving house.

I flagged it in a story last December that Indonesia was prepping to move its capital from traffic-snarled, smog-ridden Jakarta to a city on the island of Borneo.

Now President Joko Widodo, known to all as Jokowi, has confirmed that the plan is going ahead, and to which precise destination. The plan announced by Jokowi this week will see the capital shift to a new city to be built near the port of Balikpapan, on the east coast of the island of Borneo.

The project is budgeted at US$33 billion, which frankly seems extremely low. Construction is slated to start in 2021, with parts of the government moving shop by 2024, which also seems like an aggressive timeline. Expect that budget to blow out, and the timeframe to slide.

The government aims to fund only 19% of the project, which would move 1.5 million government workers, out of its own coffers. The rest will come from public-private partnerships and private investment, so there should be plenty of lucrative contracts doing the rounds.

Investors should watch cement companies such as Indocement Tunggal Prakarsa (PITPY) and Semen Indonesia Persero (PSGTY) as those infrastructure contracts get doled out.

There are only two pure-play Indonesia-focused tracker funds. The iShares MSCI Indonesia ETF (EIDO) is by far the bigger, with US$379 million in assets under management, which nevertheless is small by country-specific standards.

The VanEck Vectors Indonesia Index ETF ^MID is tiny, with just US$39 million under management, but interesting because it caps any one component at a maximum weighting of 8%. This means it gives less weighting to the banks that dominate the MSCI fund.

I'd favor the VanEck fund for its broader Indonesian exposure. That also includes four components out of 44 that are not based in Indonesia but get more than half their revenues there. They include the Thai energy company Banpu (BNPJY) , which has huge coal mines in Indonesia.

It also includes Singapore-based Jardine Cycle & Carriage (JCYGY) , which owns a majority stake in Astra International (PTAIY) , Indonesia's largest conglomerate and top automotive group. Astra stands to win from the new city's construction in a number of ways.

Astra owns the port in East Kalimantan, near the site of the new capital. Astra's seven business segments also include toll roads, construction machinery and real estate, all potential beneficiaries of the move.

The MSCI index is a straight market-cap weighted fund. That gives huge emphasis to financials, which aren't obvious direct gainers from the switch in capital city. In fact, those businesses will remain Jakarta-centric.

Bank Central Asia (PBCRY) , Bank Rakyat Indonesia (BKRKY) and Bank Mandiri (PPERY) are three of the four biggest companies by market cap in Indonesia. Combined, they make up 42% of the MSCI ETF's exposure.

The third-largest company in the country is another gainer from the capital's shift. Telekomunikasi Indonesia (TLK) should win contracts for the communications infrastructure that the highly wired new capital will require.

The idea behind moving the capital is to ease the stress on Jakarta, which is due to overtake Tokyo as the most-populous city in the world by 2030. It should also spread the wealth in a nation where Jakarta's island, Java (59%), and next-door Sumatra (22%) account for fourth-fifths of the economy.

Jakarta will remain the financial capital of Indonesia, the fourth-largest nation in the world by headcount - 263 million heads at last count. Jakarta will retain functions like the stock market, while political figures and government departments will shift to the new city, which doesn't yet have a name.

Jokowi clearly envisions this shift as part of his legacy. One reason for the attempt to hit 2024 as a date for some government offices to shift is that it is the last year of his second and final term, which just began. Jokowi, incidentally, was Governor of Jakarta before taking the reins of the nation.

Balikpapan is a central location within a nation of 17,000 islands. Its chief attraction, though, is that Borneo is not volcanic, distinct from the "ring of fire" that connects the Thai coast through Indonesia and the Philippines up to Japan.

It is not therefore as prone to earthquakes, tsunamis and volcanic eruptions as the rest of the island chain. It is also not sinking, while parts of Jakarta are dipping eight inches per year thanks to wells drawing aquifer from the city's swampy surrounds. Some 40% of the current capital is already below sea level, and during the typhoons and tropical storms that sweep the region, much of the city floods.

Jakarta has an official population of 10 million. But greater Jakarta, spanning several surrounding cities, tops 30 million now. That tally should reach 35.6 million as the conurbation adds 4.1 million people between now and 2030, according to Euromonitor. Greater Tokyo, with an ageing populace, should dip by 2 million to 35.3 million over the same timeframe.

The concept of moving to Borneo was outlined, to my great surprise, by the deputy governor in charge of special planning for the Jakarta Capital City Government. He, like me, was part of a panel of speakers organized late last year by the Urban Land Institute.

At the time, there were three candidate destinations on his desk. All, however, were in Kalimantan, the Indonesian part of the island of Borneo. It's an island that the country shares with the Malaysian states of Sabah and Sarawak, as well as the famously wealthy sultan nation of Brunei. We now know which of those three plans has won out.

Brazil has Brasilia. Kazakhstan has Astana. Less successfully, Myanmar, or Burma, shifted its capital to Naypyidaw on an astrological whim. Indonesia has - the new Chief City that does not yet speak its name.

At the time of publication, Alex Frew McMillan had no position in the securities mentioned.