Indonesian voters elected Joko Widodo as president last year, enraptured by his promises of political stability and rising investment, especially on infrastructure. With little visible progress eight months after he took office, however, investors are becoming restless. “We have to reinvent our economies; we have to reinvent our societies,” proclaimed Jokowi, as the Indonesia president is locally known, at the recent World Economic Forum on East Asia in Jakarta. “We must change ... from consumption to investment in our infrastructure, investment in our industry, but most importantly, investment in our human capital, the most precious resource of the 21st century.”
Indonesia, the largest economy in Southeast Asia, holds tremendous promise. It has powerful demographics, a low debt-to-GDP level of 26 percent and a solid trend growth rate of 5.4 percent over the past 15 years, better than the 5.1 percent average for countries of the Association of Southeast Asian Nations. But softer global growth has hurt an economy dependent on exports, such as palm oil and coal. Indonesia’s growth rate touched a five-year low of 4.7 percent in the first quarter of this year, and the rupiah is one of emerging Asia’s weakest currencies, having fallen nearly 13 percent in the 12 months ended May 21.
Fiscal adjustments are beginning to have the intended effect of bringing domestic demand into line with supply. The government took advantage of the drop in global oil prices to trim fuel subsidies in November and then eliminated them on January 1, slowing imports and prompting five straight months of trade surpluses. Indonesia has bolstered its foreign exchange reserves to $111 billion, up from $92 billion in 2013. “There is a bit of slowdown, but it’s happening for all the right reasons,” contends Jan Dehn, head of research at London-based emerging-markets specialist Ashmore Group.
The concern is that improvements in the trade balance are driven by weaker imports and slower domestic demand rather than rising exports, says Dehn. The Bank Indonesia, historically susceptible to political interference and often late in making interest rate decisions, is facing pressure to slash rates to help the government achieve its growth target of 7 percent. If the central bank obliges, consumption will bloom, imports will rise and the deficit is likely to reappear.
The way to revive growth without worsening the trade balance is to increase productivity, claims Dehn. Exports become more competitive, and improvements — such as technological advances — are often permanent so economic development is more enduring. “The infrastructure issue, by any stretch of the imagination, is supremely the most important issue in Indonesia,” reckons Dehn. Gridlock traffic and electricity blackouts, among other problems, have contributed to a 1 percent loss of economic growth each year since 2004, the World Bank estimates. The centerpiece of Jokowi’s economic program is to begin to alleviate such constraints — his administration aims to raise infrastructure spending from about 2.5 percent of GDP to some 4 percent of GDP over the next five years, building 15 airports and 24 seaports and constructing more housing. Investors must be patient, however, as the nationwide programs require risky up-front development costs and long-term financing. “Infrastructure is probably the most complex thing that a government can do,” says Dehn.
Jokowi’s plans enjoy widespread support, but he risks being rendered a lame duck if he fails to deliver. The president’s approval rating is tumbling, down to 57.7 percent in April, according to Indo Barometer, compared with 75 percent when he entered office.
Although, five months into 2015, the administration has committed only 1.5 percent of the year’s projected capital budget, progress has been made on feasibility studies and inviting bids. Ashmore Group anticipates infrastructure spending to vault in the next 12 months. Investors are beginning to recognize this, says Dehn. Foreigners own up to 39 percent of all Indonesian local-currency bonds, a near record share. “It’s going to continue to be a story that rewards investors that take a longer-term view in Indonesia,” says Dehn.
