Ailing Indonesia in dire need of reforms
But after failing to reform its economy and tackle its infrastructure backlog, it has taken a hammering on global markets as its economy slows, and inflation and its trade deficit rise.
And with a new parliament and president to be elected next year, the future of one of the world's biggest developing economies could be clouded for some time, the Australian National University's annual Indonesia update has been told.
Indonesia's new Finance Minister is ANU economics graduate Chatib Basri, who said last year that Indonesia's three top priorities were "infrastructure, infrastructure, and infrastructure".
But Jakarta economist Moekti Soejachmoen said little had been done to improve the country's ports, roads and rail, while President Susilo Bambang Yudhoyono's government still spent more on fuel subsidies than it did on education and health combined.
Bambang Haryamurti, editor-in-chief of the acclaimed Tempo magazine, warned a claim by unions for a 50 per cent rise in the minimum wage was adding to pressures slowing the economy and lifting prices.
The head of federal Treasury's domestic economy division, Jason Allford, just back from two years in Jakarta, said growth had slipped to a three-year low, while inflation had jumped above 8 per cent. The rupiah had slid more than 15 per cent, and the current account deficit is a record $US40 billion ($42.3 billion) a year.
But Mr Allford advised calm, saying the Indonesian economy was still strong, after a decade of growth averaging 6 per cent a year.
He said private and public debt was much lower than it was before the 1997 Asian financial crisis, and fiscal and monetary policy were well managed.
He blamed the rupiah's slump partly on the markets themselves - "Did the financial markets not know that the US was going to have to normalise monetary policy at some point?" he asked - and partly on Indonesia's failure to reform its spending priorities, labour markets, competition policy and state-owned enterprises, to make its economy "more robust" in whatever circumstances it faced.
Dave McRae of the Lowy Institute said Indonesia's new president would probably be a reformer. Popular Jakarta governor Joko Widodo is the frontrunner, ahead of ex-general Prabowo Subianto, who is banned from the US after kidnapping student protesters in 1998. But it was still unclear what any of the candidates' policies would be.
Dr McRae said it was also unclear whether Mr Widodo will be allowed to run, since his party was controlled by former president Megawati Soekarnoputri. She had yet to rule out standing again, and other party leaders also had presidential ambitions.
Frequently Asked Questions about this Article…
Markets have grown worried because Indonesia has struggled to reform its economy and clear an infrastructure backlog, which has coincided with slowing growth, rising inflation and a widening trade/current account deficit. The article notes inflation jumped above 8%, the rupiah has slid more than 15%, and the current account deficit reached a record US$40 billion a year — all factors that have put pressure on investor confidence.
A significant fall in the rupiah can reduce returns for investors who convert local currency gains back to their home currency. The article points out the rupiah’s slump has been driven partly by global market expectations and partly by Indonesia’s failure to implement certain reforms, so currency volatility is a key risk for foreign and domestic investors alike.
According to analysts quoted in the article, Indonesia needs reforms in several areas: clearer spending priorities, improvements to labour markets, stronger competition policy, restructuring of state-owned enterprises, and a major push on infrastructure (ports, roads and rail). Finance Minister Chatib Basri has even named 'infrastructure' as his top priority repeatedly.
The article highlights that the government still spends more on fuel subsidies than on education and health combined. Large fuel subsidies can crowd out spending on infrastructure and human capital, add pressure to public finances, and complicate the case for longer-term economic reform — all of which matter to investors assessing fiscal sustainability and growth prospects.
A large current account deficit, reported in the article as about US$40 billion a year, signals that the country is importing more capital and goods than it exports. That can make the economy more vulnerable to shifts in global investor sentiment and currency pressure (as seen with the rupiah), so investors should monitor external balances as an indicator of risk.
Yes. The article says a new parliament and president to be elected next year could cloud the country's future for some time. Analysts note it’s unclear what the candidates’ policies will be — even the frontrunner Joko Widodo’s ability to run is uncertain — so political uncertainty around the election can increase market volatility and influence investment decisions.
The article stresses that Indonesia’s infrastructure backlog — weak ports, roads and rail — is a major drag on productivity and growth. Finance Minister Chatib Basri has repeatedly named infrastructure as the top priority, and economists in the piece warn little has been done to improve transport links. Better infrastructure would support growth and make the economy more attractive to investors.
The article reports that private and public debt are much lower than they were before the 1997 Asian financial crisis, and that fiscal and monetary policy are generally well managed. While that reduces some legacy debt risk, other challenges — high inflation, a large current account deficit, currency weakness and the need for reforms — remain relevant for investor risk assessments.
Call 1300 880 160
Start a chat
Schedule a call
