Indonesian stocks led Asia’s big economies, ahead 10% in dollar terms through March on the MSCI Index, as President Joko “Jokowi” Widodo took the investor-determined reformer crown from Indian PM Narendra Modi after a cabinet shakeup and deregulation package. He brought in a well-known private equity executive as trade minister, and removed 35 industries from the “negative list” barring foreign participation.
In the last quarter of 2015, high-profile transport infrastructure projects were unblocked and plans were also set to cut port handling and power station licensing times. International companies still await clarification on previously prohibited sector entry especially in services, and logistics may improve with faster cargo and energy permit processing but the period required still lags neighbors. The government announced that direct investment commitments tripled in January-February to $27 billion in the wake of the president’s moves, but they may not be realized to reach his post-election 7% annual GDP growth target without policy execution and bolder competitive vision and repeat India’s disappointment pattern.
In 2015 economic growth was below 5% for a five-year low, the rupiah fell 10% against the dollar, and foreign investors trimmed one-third ownership in local government bonds as well as equities. FDI was essentially flat in hard currency terms and the budget deficit veered toward the 3% of GDP statutory limit with a public spending spree. Inflation was outside the 5% upper target level with depreciation, inviting central bank tightening.
The main positive macro features were a steady 5% private consumption increase and one-third drop in the current account gap to under 2% of GDP with import compression. The administration’s early initiatives to establish a “one-stop” approval shop and mobilize $500 billion in infrastructure allocation by end-decade generated meager results, so he promoted a dozen separate liberalization and fast-track actions to recover momentum and offset flailing headline performance.
Fund managers, souring on the China and India stories, seized on the openings in regional context and as a departure from Indonesia’s historically ambiguous stance, which coincided with a revived risk-on global liquidity cycle, with Japanese investors in particular looking for higher returns abroad. Official and private economic growth forecasts have been lifted this year to over 5%, and inflation is in the 3-5% target zone allowing the central bank to reduce rates on consecutive occasions to less than 7%.
Along with stocks local bonds have rallied, with the benchmark yield below 8%, and foreign investors have added holdings with domestic pension and insurance funds now obliged to raise their government paper exposure to one-fifth of assets. With better tax revenue anticipated with amnesty and planned further fuel subsidy reduction, fiscal policy is again on track, and the rupiah has strengthened to the 13,000 range per dollar. The president has hailed billions of dollars in net portfolio inflows and called for the 6.75% policy rate to further fall despite the monetary authority’s nominal independence.
Banks leery of lending
However, banks remain wary of lending as the non-performing ratio, particularly for longstanding personal and commodity firm borrowers, may reach 4 % this year, according to rater S&P, the only of the big three agencies not yet to assign sovereign investment-grade status. Credit growth has not returned to the previous double-digit pace pending further economic diversification into manufacturing and services like tourism and e-commerce for new relationships, and future imposition of a deposit rate cap that will squeeze margins.
Stock-exchange company earnings continue to be lackluster, and one-third of listings are on negative outlook for external bonds also, although 2016 maturities are modest at around $1 billion. After the recent default of telecom operator Trikomsel, the vulnerable list highlights sectors targeted by the president’s self-proclaimed “big bang” access facilitation including media, retail and real estate.
Agriculture is another fragile business area as a smaller “La Nina” weather system threatens damage. Big power projects, often touted as overarching real economy and financial market catalysts, remain hampered by unfavorable domestic and global pricing, and by complex land acquisition and nine-month approval rules under new guidelines lagging neighbors that will curb infrastructure and investor enthusiasm after the relative burst.
Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington, D.C.