Indonesia's Economy Has Stopped Emerging
Indonesia has come a long way since Oct. 20, when Joko Widodo was sworn in as president. Unfortunately, the distance the country has traveled has been in the wrong direction.
Expectations were that Widodo, known as Jokowi, would accelerate the reforms of predecessor Susilo Bambang Yudhoyono -- upgrading infrastructure, reducing red tape, curbing corruption. Who better to do so than Indonesia's first leader independent of dynastic families and the military?
In 10 years at the helm, Yudhoyono dragged the economy from failed-state candidate to investment-grade growth star. Jokowi's mandate was to take Indonesia to the next level, honing its global competitiveness, creating new jobs, preparing one of the world's youngest workforces to thrive and combating the remnants of the powerful political machine built by Suharto, the dictator deposed in 1998. After 291 days, however, Jokowi seems no match for an Indonesian establishment bent on protecting the status quo.
Growth was just 4.67 percent in the second quarter, the slowest pace in six years. What’s more, a recent MasterCard survey detected an "extreme deterioration" in consumer sentiment, which had plummeted to the worst levels in Asia.
Investors are already voting with their feet. The Jakarta Composite Index has fallen 13 percent from its April 7 record high, one of Asia's biggest plunges in that time. And foreign direct investment underwhelmed last quarter, coming in at $7.4 billion, little changed from a year earlier in dollar terms.
Jokowi has plenty of time to turn things around; 1,535 days remain in his five-year term. But the "halo effect" MasterCard's Matthew Driver says Jokowi carried into office is fast fading as Indonesia's 250 million people flirt with buyer's remorse.
First, Jokowi must step up efforts to battle weakening exports. Indonesia's weak government spending, stifling bureaucracy and conflicting regulations would be impediment enough; slowing world growth makes matters much worse. Jokowi must greenlight infrastructure projects to boost competitiveness and increase the number and quality of jobs.
Next, Jokowi must decide what kind of leader he wants to be: a craven populist or the modernizer Indonesia needs. He has too often resorted to nationalistic rhetoric that hearkens to the Indonesian backwater of old -- a turnoff for the multinational executives Jakarta should be courting. Last month, Jokowi raised import tariffs, while asking visiting U.K. Prime Minister David Cameron to do the opposite by cutting U.K. duties for Indonesian goods. Jokowi isn't helping his constituents by driving up prices for goods while their currency is weakening.
"Rather than pursuing interventionist policies the Indonesian government needs to return to the basics: infrastructure, logistics, and consistency of rules and regulations," economists Arianto Patunru and Sjamsu Rahardja wrote in a report for the Lowy Institute for International Policy.
That means taking on entrenched interests and thinking bigger. Take Jokowi's industrialization push. Understandably, he wants to support the development of manufacturing to boost exports and cut a persistent current-account deficit. But Jokowi needs to complement that policy with investments in education and training. With more than 26 percent of its population under 15 (versus 17 percent in China), Indonesia must prepare for the information economy of the future, too.
While it's still early for Jokowi, Indonesia is already paying a price for his mismanagement. The rupiah is down 13 percent over the past 12 months -- and the Federal Reserve's first post-quantitative-easing rate hike is still looming on the horizon. It's not an accident that economists now include Indonesia among the emerging markets are now due for a lost decade. The problem for countries like Brazil, Russia, China and Indonesia is their governments grew complacent after multi-year investment booms.
"Very few emerging markets historically have ever been able to make it to the developed countries," Morgan Stanley's Ruchir Sharma told Bloomberg News. "This is a return to normalcy."
It's also a moment to question how far the entire Southeast Asia region has come in recent decades. Thailand is fast losing steam as the latest military junta to rule the nation neglects the economy. Malaysia's currency is at 17 year lows as Prime Minister Najib Razak tries to explain $700 million that allegedly made its way into a bank account he controls. And now Indonesia is losing the investment it worked so hard to win back since Suharto's ouster. Jokowi can still turn things around, but he's got a lot of convincing to do -- both inside Indonesia and out.
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