Indonesia: Too few roads and too much credit

Car makers are drooling over Indonesia’s record number of auto sales, which could top one million vehicles by 2013, according to GAIKINDO, the Joint Indonesian Automotive Industries. GM, Tata Motors and BMW are upping their bets in the country. Toyota, already the largest car maker there by revenue, said they’re investing $387 million more in a new factory.

The challenge they might face is aptly described by FT’s beyondbrics: “Indonesia: more cars, no roads,” but lamentable infrastructure is a snag compared to the risk of bubbly consumer credit.

Car dealers in Indonesia have been waging a pricing war that pushed down payments to practically zero, fueling car sales while increasing the risk of defaults. This is in addition to an underutilized personal credit rating system, with only one out of five Indonesians accounted for by the Credit Bureau.

Now the central bank has warned that it may impose regulations to tamp the explosive growth in auto and property lending, which ride on providing easy credit to low-income borrowers (sound familiar, anyone?). But such a move means that others like Rachman, a farm worker from West Java who earns about 1 million rupiah each month, won’t contribute to auto sales by buying his 12.5 million rupiah motorcycle.

With 80 per cent of auto purchases made through bank loans, car makers may want to take their eyes off the road and check on the state of Indonesian consumer credit.

Revised on September 18, 2011.

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