Indonesian President Jokowi was a gracious host for a recent World Economic Forum and the BRICS may eventually allow another ‘I’ into their new bank and summits, but foreign investors mostly bridle at muddled and retrograde policies during his nine months in office.
The stock market is down almost 15 percent on the MSCI index, and the rupiah is at a post-Asian financial crisis low toward 13,500/dollar despite a foreign currency ban for routine domestic transactions. GDP growth in the first quarter at 4.7 percent was the worst in five years and inflation is above target at 7.5 percent, the highest in the region.
Foreign direct investment was up 15 percent for the period from last year’s pre-election plunge and a ‘one-stop shop’ was launched to great fanfare, but signature infrastructure and mining projects remain hobbled by dozens of ministry reviews.
The President’s picks for top policy jobs, including Vice President Kalla, have clashed with him and contradicted each other, reflecting a weak political base and incoherence over fiscal and competitive direction, as 95 percent of the public in a recent opinion poll demanded a cabinet reshuffle.
Jokowi owes his position to support from the PDI-P party leader Megawati Sukarnoputri who ran unsuccessfully for the prize herself in the past, but the campaign’s platform was a vague anti-poverty and pro-business balance overshadowed by his clean, hands-on reputation as a mayor and Jakarta governor.
His opponent was a former establishment general backed by the vestiges of the Suharto-era commercial elite, whose tenacious influence he never pledged to uproot completely. Early appointments to the police, anti-corruption agency, and oil and gas industry regulator were swayed by the input of well-known former officials at odds with the avowed populist stance and roundly criticized by his voters.
The President was initially praised for following through on his predecessor’s decision to reduce fuel subsidies, but the fiscal deficit has since worsened to 2 percent of GDP with social spending and lagging tax collection. Failure to reach the 7 percent growth target has been blamed on decreased Chinese commodities exports, although lower energy import costs shrink the current account gap.
But plans to stimulate domestic demand through high-profile transport projects have been waylaid by bureaucratic infighting and uncertain private sector participation. A $2 billion airport railway line is still delayed over permitting and negotiations with Chinese and Korean contractors, erasing Jokowi’s can-do reputation as Jakarta head when he built a new ring road.
The country’s logistics burden alone is equal to one-third of GDP in stark contrast with that of Malaysia, Thailand and Vietnam, according to a World Bank study.
Restructuring of the state hydrocarbons producer Pertamina is stuck, and the raw minerals export embargo may be extended until 2017. Copper and iron producer Freeport-McMoRan has been in lengthy environmental and tax disputes with the government.
Such actions impede an East Java diversification push to avoid overcrowding on the main island, a strategy which unites the main political parties and companies of all sizes. Consumption and construction have weakened as banks were ordered to pare overextended car and real estate loans.
The central bank has relaxed limits but overall credit growth has softened to 5 percent as borrower defaults rise. The pullback has hammered sales for bellwether stock market listings like the Astra conglomerate, where profit fell 25 percent in the first quarter.
Foreign investors control 80 percent of the exchange free-float and also 40 percent of local government bonds and capital outflows have accelerated in recent months, signaling discontent despite compelling valuations and yields.
The benchmark 10-year bond return has drifted to 9 percent, as state banks and pension funds may again be summoned for extra support. External corporate debt at $150 billion, exceeding international reserves, may be the leading financial vulnerability, as property developers are stretched to repay in dollars from rupiah cash streams.
Defaults may be imminent and help rouse the President and his team from their acrimony and torpor at this early stage, but with widespread customer rejection, the former furniture executive would be better served by full-scale personnel and policy remodeling as a future centerpiece.
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