But tight funding, higher costs and supply chain challenges present risks

JAKARTA -- The outlook for Indonesia's textile and garment makers appears positive, after two years of pandemic-driven disruptions that decimated the industry. With growth in the sector having returned, it now faces a complex mix of factors.

Domestically, a reluctance to lend to the sector over lingering debt concerns has the potential to constrain growth, while rising costs in the form of high shipping and raw material prices are adding pressure, meaning the coast is far from clear.

Internationally, China is coming under growing pressure over human rights in its far western region of Xinjiang, which means its textile sector could be hit and possibly increase export opportunities for Asian countries such as Indonesia. U.S. Customs is preparing to enforce a ban on imports traced to Xinjiang, including cotton, from Tuesday in response to allegations of forced labor and other abuses of Muslim Uyghur and other minorities. China denies the claims.

But a potential roadblock facing regional textile exporters are proposed rules from the European Union that would force "fast fashion" companies to overhaul clothing designs to adhere to numerous criteria regulating requirements including how long a garment lasts and how much recycled yarn it contains.

The pandemic delivered a blow to Indonesia's garment and textile sector, which contracted 8.9% in 2020 and 4.1% last year, according to Statistics Indonesia, as coronavirus lockdowns and shop closures weighed on sales and sent global logistics into disarray. But the sector in the first quarter of this year expanded 12.5% year on year, following a 5.9% gain in the final three months of 2021.

"We are very optimistic," said Redma Gita Wirawasta, secretary-general of the Indonesian Filament and Fiber Producers Association. "In the last quarter of 2021, there were no restrictions, activity was normal, and purchasing power increased."

While the easing of pandemic-related curbs that hindered the sector such as reduced capacity at factories and strict social distancing rules has buoyed hopes, Indonesian manufacturers have to contend with headwinds, including high shipping and raw material prices, limited access to funding and cheap Chinese imports undercutting local businesses.

Risks from global inflation and geopolitical tension are also casting a shadow over the industry. Indonesia's central bank in April lowered its full-year economic growth estimate for the year to between 4.5% and 5.3%, from 4.7% to 5.5%.

"The sector has been in a lot of trouble over the past 24 months or so, and there are still some lingering effects," said Kah Ling Chan, senior director for Asia-Pacific corporates at Fitch Ratings. "Funding is a little bit tight. I don't expect business to rebound in a meaningful way."

Problems in the industry have the potential to reverberate through the wider economy given its importance to Indonesia's non-oil and gas exports and employment. Despite often being referred to as a sunset industry, textile and garment production in 2020 accounted for 6.08% of total growth in the manufacturing sector. The International Labor Organization says it believes around 2 million people are employed in the textile and garment industry in the country. 

Some of the problems include two of the country's largest listed manufacturers having had to ask their lenders to restructure their debt.

PT Sri Rejeki Isman Tbk, or Sritex, narrowly escaped bankruptcy in early January when most of its lenders agreed to a court-sanctioned debt restructuring process, details of which were outlined in a filing with the Singapore Stock Exchange.

Though the Semarang regional court in Central Java ratified the proposal, its ruling has been appealed by some lenders and the case will be decided by Indonesia's Supreme Court.

PT Pan Brothers, which produces clothes for Ralph Lauren, Prada and Adidas, meanwhile, needs to repay or refinance $309 million of debt, including a $171 million bond that matured in January, Fitch said.

According to Fitch's Chan, banks are becoming more reluctant to extend loans to the sector, a problem that started when another Indonesian textile company, Duniatex, defaulted in 2019, leading lenders to reassess their exposure.

"When Duniatex defaulted," she said, "banks and some of the bondholders were caught in a bind, and that filtered through the broader industry, especially when COVID came."

Though the mood among Indonesian garment exporters has brightened since last year, pandemic-related logistics bottlenecks and high shipping costs continue to weigh, industry insiders say.

"The export market is not so attractive for us," said Redma of the Indonesian Filament and Fiber Producers Association, adding that container shortages and freight prices have made fulfilling overseas orders difficult.

Widjaya Djohan -- president and director of Trisula International, one of Indonesia's largest garment manufacturers -- called snarled logistics "sufficiently influential but not significant."

Djohan said export sales, especially in the major markets of Australia, Japan, England, New Zealand and the U.S., grew 14% in 2021 and that he was positive about business prospects for this year. 

"The challenge of the garment industry today is global product competition," he said.

Deasy Pane, an official at Indonesia's National Development Planning Agency, said the country's textile industry is not competitive enough.

"Many textile companies have outdated machinery," she said, "while textile products continue to require new machinery to keep up with changing demand."

Furthermore, she added, "labor costs in Indonesia are rising, reducing the country's competitiveness in producing low-cost fast fashion, making it difficult to compete with Vietnam and Bangladesh."

To help protect the local textile industry, the government has renewed safeguard tariffs on various imported fabrics and yarn over the past two years -- moves welcomed by upstream manufacturers but ones that could ultimately raise costs for garment producers.

"Importing inputs for production should be made more accessible," Pane said, adding that cutting labor costs would also prevent Indonesia from being priced out of the market.

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