Indonesian Minister of Finance Sri Mulyani Indrawati speaks during a panel discussion on financial inclusion at the 2016 annual meetings of the International Monetary Fund and the World Bank on October 7, 2016. Photo: AFP/ Zach Gibson
Indonesian Minister of Finance Sri Mulyani Indrawati speaks during a panel discussion on financial inclusion at the 2016 annual meetings of the International Monetary Fund and the World Bank on October 7, 2016. Photo: AFP/ Zach Gibson

Indonesia stocks, which have lagged the region and the broader MSCI Emerging Markets Index with a 12% advance through July, revved up briefly after the central bank announced a surprise 25-basis-point interest-rate drop to 4.50%, against the consensus “unchanged” forecast in a regular economists’ poll.

The interest-rate cut followed weaker-than-expected second-quarter 5% growth, with private consumption, which accounts for half of Indonesia’s gross domestic product, barely ahead despite the May-June Ramadan fasting holiday that is typically a catalyst. The head of the government statistics bureau explained it as “people psychologically holding back spending” amid declining wages in the agricultural and construction sectors.

The monetary easing came with inflation comfortably within the 3-5% target band, and the rupiah in essence flat against the US dollar after a big depreciation last year. Credit growth is also subdued and will stay below 10% annually on increased bank caution, after a June Financial System Stability Assessment stress test by the International Monetary Fund (IMF) flagging risks.

Fiscal policy – which previously cheered foreign investors, who have plowed US$9 billion into local debt and equity so far in 2017 – has also raised doubts as the deficit bumps against the legal ceiling of 3% of GDP, which prompted President Joko Widodo to delay another infrastructure stimulus and streamlining package originally scheduled for the mid-August anniversary of Indonesian independence.

These steps were designed to attract tens of billions in dollars in additional foreign direct investment and help lift the country’s No 90 ranking in the World Bank’s “Doing Business” publication, as both natural-resource and manufacturing companies exit for friendlier locales in Asia and beyond. The FDI inflows are also needed to cover a current-account hole that in July returned to 2% of GDP on the first trade deficit in two years.

Finance Minister Sri Mulyani Indrawati and her colleagues envisage more ambitious economic growth and fiscal targets in 2018, at 5.5% and 2% of GDP respectively, but the predictions are subject to volatile worldwide capital flows, and uncertain tax and public-private project benefits at home. Widodo promised 7% GDP expansion on taking office and more recently to develop “every inch” of the country, and has until 2019 when his term ends to honor the commitments.

Government debt is low at 30% of output, half the statutory limit, but the main opposition Great Indonesia Movement Party (Gerindra) characterizes the past year’s increase as “dangerous” and demands only “priority” infrastructure allocation.

Sri Mulyani meanwhile has labeled the 11%-of-GDP tax-revenue ratio as “low and unacceptable” and plans a 5% rise with better collection and enforcement.

On the spending side, the 2018 state budget has less for defense and security, despite the threat of Islamist terror, and a new environmental levy on plastic bags, while preserving civil-servant salary levels.

Investment Coordinating Board chief Thomas Lembong, a former private-equity executive, has identified $10 billion in near-term urgent power-plant and toll-road ventures, but he has turned to foreign pension funds for financing after a lukewarm response from strategic industry partners.

Widodo’s goal of completing 1,000 kilometers of toll roads over his tenure has encountered trouble as officials underestimated land-acquisition costs, and tried to compensate by forcing developers to cover the difference from original projections. They also frequently resort to post-bid renegotiations, violating principles of standard utility practice, according to experts.

At the same time, poor energy-investor marks serve as a warning to power participants, with a PriceWaterhouse survey of 50 companies citing concerns over “stagnation”, as Indonesia is due to become a net hydrocarbons importer by the end of the decade, and contract sanctity.

Upstream oil and gas investment was just $4 billion in the first half, against the full-year $22 billion outreach. At a bilateral economic dialogue with China this month, Indonesian delegates recognized the backlash against changing deal terms if they are to attract both normal and Belt and Road project interest.

The IMF’s banking and capital-markets review reinforced unease as severe stress test scenarios showed sizable credit losses from corporate exposures notwithstanding the headline below-5% bad-debt ratio, and criticized “shallow” securities activity versus peers with the small domestic investor base.

It called for further liquidity rules and clarification of the financial-crisis management framework, which assigns outsize responsibility to the president, rather than line regulators, when he may otherwise be preoccupied in larger-stroke symbolic and practical maneuvers beyond the central bank’s to tip depositor psychology.

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