Indonesia’s next president will need to discard election rhetoric and focus on raising fuel prices and luring foreign investment to address the budget and current-account deficits, the outgoing finance minister said.
The economy is still fragile and the incoming administration must prepare for investors pulling funds from emerging markets such as Indonesia when the Federal Reserve starts to increase borrowing costs, Chatib Basri said in an interview in Jakarta on June 18. Presidential candidates for the July election, Joko Widodo and Prabowo Subianto, have struck a protectionist tone in campaigning, saying they will look to renegotiate some contracts with foreign investors.
Southeast Asia’s biggest economy is struggling to contain a persistent current-account deficit that helped make the rupiah Asia’s worst performer last year, while ballooning fuel subsidy costs have increased the 2014 budget shortfall and forced a reduction in state spending. The former OPEC member isn’t likely to become a net oil exporter again as production declines, leaving a long-term revenue shortfall for policy makers to deal with, Basri said.
“There’s no way that this country can achieve 7 percent growth without being open to foreign investment, or you end up with a persistent current-account deficit,” Basri said. “Policy would be constrained by this economic rationality.”
The rupiah has fallen 4.7 percent this quarter as the election race tightened and the trade deficit widened. The currency strengthened 0.5 percent to 11,934 per dollar in Jakarta yesterday, according to prices from local banks, after Fed Chair Janet Yellen said on June 18 that U.S. rates will stay low “for a considerable time” after the monetary authority ends its bond-buying program.
“We need to anticipate the possibility of capital outflows from emerging markets including Indonesia,” Basri said.
Investor concern over the currency will remain until a definitive result of the July 9 election is known, Basri said. The current administration’s efforts to damp domestic demand and the central bank’s interest rate increases mean the current-account deficit is expected to be between 2.5 percent and 3 percent of gross domestic product this year, Basri said. The shortfall was 3.26 percent of GDP last year.
The tightening bias will continue this year and that means the next government may see 2015 growth of under 6 percent, Basri said. GDP rose 5.21 percent in the first quarter from a year earlier, the least since 2009, official data show.
Presidential frontrunner Widodo has said he is confident the economy can grow more than 7 percent with improved regulations, while Prabowo, an ex-special forces general, wants to boost growth to as much as 10 percent by raising more money from capital markets and with tax. Widodo’s lead over Prabowo has narrowed to about six percentage points, according to a June survey by polling company Lingkaran Survei Indonesia, down from 13 percentage points a month earlier.
“I don’t think there would be major changes to policy whoever becomes president,” Basri said. “Both of them need to ensure they could provide jobs to reduce poverty, otherwise they won’t get the political support.”