October 18, 2017 / 1:45 AM / a year ago

Breakingviews - Indonesia's slowdown belies Jakarta's reform spin

TOKYO (Reuters Breakingviews) - Few central banks have been busier over the last 22 months than Indonesia’s. Despite eight easing moves, however, growth is stuck at 5 percent, lagging China, India, the Philippines and Vietnam. Consumer spending was down an average 1.1 percent in July and August year-on-year.

Indonesia's President Joko Widodo gestures during an interview with Reuters in Jakarta, Indonesia, July 3, 2017. REUTERS/Beawiharta

Foreign investors are heading for the door, dumping more than $2 billion of shares in the third quarter – the biggest ejection of foreign funds from Indonesian stocks since the 2013 Federal Reserve “taper tantrum.” 

The problem is President Joko Widodo, popularly known as Jokowi, hasn’t fulfilled bold pledges to accelerate structural upgrades, implement projects to improve roads, bridges, ports and power grids, and create well paid jobs. Nor has he eliminated a current-account deficit that stood at $4.9 billion in the second quarter - another sore point. The World Bank now lists the rupiah among Asia’s most vulnerable currencies.

To be sure, Indonesia is not on the verge of crisis. Jokowi deserves credit for increasing accountability and transparency since taking office, and he has pushed a successful amnesty tax plan to spark investment at home. He also has kept up predecessor Susilo Bambang Yudhoyono’s anti-corruption campaign. In the last year alone, Jakarta moved up to 36th place from 41st in the World Economic Forum’s latest global competitiveness index.

But if Jokowi wants Indonesia to join the Group of Seven by 2030, as consultancy McKinsey predicts, he must get much more out of the two years he has left in office. That means implementing an ambitious $350 billion infrastructure programme, upping investments in education and training, and attracting more multinationals. The latter requires he curb the forces of economic nationalism at home.

The recent tussle between the government and Freeport-McMoRan sheds light on why resource-rich Indonesia isn’t pulling in more foreign direct investment. In August, the U.S. company tentatively agreed to transfer a 51 percent stake in Grasberg mine to Jakarta amid a months-long worker strike. Unsurprisingly, in the second quarter mining FDI fell by the most since 2012.

Monetary easing isn’t enough. Two-hundred basis points of rate cuts since January 2016 haven’t ignited household or business spending or quickened top-line growth. Jokowi needs to simplify investment rules, police a graft-prone bureaucracy and streamline state enterprises. Reducing bottlenecks would cheer boardrooms from Samsung to Toyota to Unilever. So would tackling land, labor and tax laws. There’s no time to waste as U.S. President Donald Trump threatens trade wars and favours a weaker dollar.

With a 68 percent approval rating and a comfortable legislative majority, Jokowi has the power to turn things around. If he doesn’t use it, sales of Indonesian assets might accelerate as investors wage a bigger tantrum - targetting Indonesia.


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