Problems deferred become millstone for Indonesia
And with a new parliament and president to be elected in 2014, 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 an 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 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 that a recent claim by trade unions for a 50 per cent rise in the minimum wage was adding to pressures already slowing the economy and hiking up prices.
The head of federal Treasury's domestic economy division, Jason Allford, just back from two years in Jakarta, said growth had now slipped to a three-year low, while inflation had jumped above 8 per cent, the rupiah had slid more than 15 per cent, and its current account deficit was a record $US40 billion ($42 billion) a year.
But Mr Allford sounded a note of 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 now 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 he also faulted 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 in 2014 would probably be a reformer.
The popular Jakarta governor, Joko Widodo, is the frontrunner, ahead of ex-general Prabowo Subianto. But it was still unclear what any of the candidates' policies would be.
Dr McRae said it was also unclear whether Mr Widodo would be allowed to run, since his party was controlled by the former president Megawati Soekarnoputri.
She has yet to rule out standing again, and other party leaders also have presidential ambitions.
Frequently Asked Questions about this Article…
Indonesia has slowed because it hasn’t fully reformed spending priorities, labour markets and state-owned enterprises and has an infrastructure backlog (ports, roads, rail). Combined with rising inflation, a large trade deficit and a weaker rupiah, those issues have pressured markets — investors should watch reform progress and macro data closely as they drive risk and return.
Inflation in Indonesia has jumped above 8% according to the report, which can erode real returns, push up local borrowing costs and squeeze corporate margins — all factors that everyday investors should monitor when holding Indonesian assets or exposure to the rupiah.
The rupiah slid more than 15%, lowering returns for foreign investors in local-currency assets and increasing import costs that feed inflation. The depreciation was partly blamed on market reactions as US monetary policy was expected to normalise, so currency volatility is a key risk to manage.
The article cites a record current account deficit of about US$40 billion a year (around US$42 billion). Large deficits can make a country more vulnerable to capital outflows and currency weakness, which can affect equities, bonds and currency exposures for investors.
The government was still spending more on fuel subsidies than on education and health combined, which limits budget room for infrastructure and productive spending. For investors, that suggests slower public investment in growth-enhancing projects until subsidy reform happens.
Infrastructure is widely touted as the top priority — Chatib Basri famously said 'infrastructure, infrastructure, and infrastructure' — but the article notes little progress on ports, roads and rail. While better infrastructure could help growth and competitiveness, it needs to be accompanied by broader reforms to be fully effective.
A new president and parliament in 2014 could cloud the outlook because policy direction is uncertain. The popular Jakarta governor Joko Widodo was the frontrunner and seen as a possible reformer, but candidate policies were unclear and party dynamics (including control by former president Megawati) could influence reform momentum — all of which matter for investor confidence.
Despite near-term pressures, analysts in the article note Indonesia had averaged about 6% growth over the prior decade and now has lower public and private debt than before the 1997 crisis. That suggests long-term potential, but investors should weigh that upside against the need for fiscal, labour and competition reforms and monitor political developments.
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