Desperate to Boost Growth, Indonesia Unveils Micro-Measures

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With his biggest reforms making little headway in a nation fraught with corruption and political jockeying, President Joko Widodo has turned to tweaks in taxes and regulation in an effort to revive waning Indonesian growth.

Yet without larger changes -- such as kick-starting long-stalled infrastructure projects and cleaning up an inefficient bureaucracy -- the raft of micro-measures may do little to strengthen the economy. The nation with the world’s fourth-biggest population needs all the momentum it can get, as emerging markets gird for a spate of volatility when the Federal Reserve raises interest rates.

Jokowi, as he’s known, is for now putting his hopes on steps such as removing the luxury tax on golf clubs and horse saddles, and ordering toll road operators to cut tariffs for Eid al-Fitr. Other features of an emerging stimulus plan include shifting funds into state-owned banks and telling them to lend at cheaper rates to some small businesses.

“It’s a clear sign they are worried about the economic outlook,” said Euben Paracuelles, an economist in Singapore at Nomura Holdings Inc. “It might help on the margins, but it’s not going to make a big impact.”

Less clear is whether the central bank has any room to pull the trigger on another interest-rate cut in coming months -- a move that could exacerbate Asia’s highest inflation rate and further undermine the region’s worst-performing major currency. Last month, the central bank said it would loosen lending rules on mortgages and automotive loans, after refraining from reducing the benchmark rate.

Policy Handcuffed

“Monetary policy is handcuffed by elevated inflation and volatile capital flows as the market braces for the Fed lift-off,” said Daniel Wilson, a Singapore-based economist for Australia & New Zealand Banking Group Ltd. “The rekindling of domestic growth is falling squarely on the fiscal authorities.”

That fiscal engine hasn’t quite warmed up. While the government has plans to boost spending to resuscitate growth running at a more than five-year low of 4.71 percent, Jokowi has yet to start a long-delayed $4 billion power project that he wanted to begin in April.

He’s still trying: late last week, the Central Kalimantan governor said a $5 billion railway will be built by Chinese and Indonesian companies. To expedite state spending, the government will protect officials from being penalized legally for procedural errors in infrastructure projects, Jawa Pos reported, citing the development planning minister.

The president needs to go much further, according to Kevin O’Rourke, a political analyst who wrote “Reformasi: The Struggle for Power in Post-Soeharto Indonesia.”

Reforms Needed

“The government’s chronic under-spending calls for a combination of reforms,” O’Rourke said in a report last week. Indonesia needs to enhance professionalism in legal system institutions, and overhaul civil-service personnel and recruit professionals who are able to carry projects through, he said.

Until then, Jokowi remains well below his target of achieving at least 7 percent growth for Indonesia during his term. The government’s target of a 5.7 percent expansion this year might be difficult to achieve, according to Finance Minister Bambang Brodjonegoro, who said today he sees the economy growing 5.4 percent at most this year and the government will strive for 5.2 percent.

In a sign of a weakening domestic economy, Indonesia’s imports plunged 21 percent in May from a year earlier, and motorcycle sales slid to the lowest since August 2012, data released Monday showed. The benchmark stock index fell 2 percent on Monday to the lowest level in 13 months.

That complicates things for monetary policy. With inflation above 7 percent, the highest among 17 Asia-Pacific economies tracked by Bloomberg, and a rupiah that’s fallen about 7 percent against the dollar this year, none of the economists surveyed by Bloomberg expect a rate cut when Bank Indonesia next meets to decide policy on June 18.

Still, “as the downside risks to growth persist, we believe more potent policy, in the form of monetary easing, will be needed,” Su Sian Lim, an economist at HSBC Holdings Plc., said in a note.

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