Indonesian hotels face carnage from Widodo's state spending cuts

JAKARTA (Bloomberg) - At the former Dutch colonial hill retreat of Bogor, Indonesian hotelier Kosasih Kadra is fretting over empty rooms and blaming President Joko Widodo for it.

Widodo banned civil servants from hosting meetings in hotels starting in December and cut the allowances they get for attending. That's hurting places like Bogor, where government events have accounted for as much as 60 per cent of the hospitality business, according to Kadra, secretary of the Indonesian Hotel and Restaurant Association in the city.

"There has been a massive impact," said Kadra, who also owns a hotel in the city that feted then U.S.-President Bill Clinton and his Asian counterparts in batik shirts at a 1994 summit. "We predict in a couple of months many hotels will have to close."

The fallout echoes the economic impact of China's anti-corruption crackdown, which hurt demand for luxury goods. In Indonesia, the president's efforts to plug wasteful government spending is hitting an industry whose growth has benefited companies including PT Hotel Sahid Jaya International in recent years.

Widodo, known as Jokowi, took office in October pledging to improve budget efficiency and free up funds for building infrastructure. Reforming the bureaucracy is a key priority to get things done, and freeing up more of the budget for roads, ports and railways will attract foreign direct investment and help the economy, he said in an interview last week.

The hotel ban saves the government 24 trillion rupiah (S$2.57 billion), according to the proposed 2015 budget.

Yet the move will reduce tax revenue for local and central administrations, and Jokowi isn't taking into account the multiplier effect of the hotel trade from transport to insurance, said Yanti Sukamdani, the head of the Indonesian Hotel & Restaurant Association and director at Hotel Sahid Jaya. Government business is even more important for hotels in remote areas across the archipelago, she said.

"Hotels can survive if the occupancy rate is 55 per cent," said Sukamdani. Anything below that would lead to layoffs in an industry employing 11 million people, she said. The government's 2015 growth target "cannot be achieved if there is a slowdown in hotel business."

Accommodation, food and drink supply accounted for 3.1 per cent of gross domestic product in Southeast Asia's largest economy in 2014, according to data from the statistics bureau. The country's hotel occupancy rate fell to 50.1 per cent in December, when Jokowi's ban took effect, from 54.5 per cent the previous month, with five-star hotels the worst hit, the bureau's data show.

"It will definitely hurt the hotel industry" and related sectors such as restaurants, food suppliers and travel, said Eric Sugandi, an economist at Standard Chartered Plc in Jakarta. "The policy will impede the real GDP growth. I would say that this is the implication of playing the populist card too much, merely to show that the government is tightening its belt, and not taking into account the side effects."

Indonesia's economy shrank last quarter from the previous three months, and full-year growth slowed to 5.02 per cent, the weakest since at least the global financial crisis. Jokowi, 53, said he's sticking to his 5.7 per cent expansion target for this year, pledging to fast-track transport projects, lift tax revenue and cut red tape to attract investment.

That's not helping the Ambhara Hotel, a four-star property in Indonesia's capital. Almost two-thirds of the hotel's occupancy last year came from government clients. In January, the rate fell to less than 2 per cent, according to sales director, Aryaduta Andi Sinta. The number of government bookings has dwindled to zero from about 50 state-sponsored events annually, he said.

The "sudden and drastic drop" in government events is forcing the hotel to search for other business, said Sinta.

Kadra and others from his organization went to see the minister of bureaucratic reform in January to ask for relief. The minister, Yuddy Chrisnandi, said he couldn't help because the ban was an instruction from the president, Kadra said.

For civil servants like Dita, the clampdown has depleted meeting allowances that used to supplement their salaries. Dita, who works in the finance ministry and asked that her full name be withheld as she's not authorized to speak publicly, said she could get about 400,000 rupiah (S$42.70) per day for attending meetings that require a hotel stay, or as much as a million rupiah per event if she was a speaker.