Police stand guard in front of the Indonesian Stock Exchange building in Jakarta on January 16, 2018. Photo: Reuters / Beawiharta

The Jakarta Stock Exchange’s unfortunate floor collapse on Monday, injuring visiting high-school students, prompted a management promise of an immediate “audit” into the cause of the accident at a time when investors are probing Indonesia’s lagging 20% MSCI Index gain last year against regional counterparts.

While investors do not consider the Monday incident a possible metaphor for outright cratering, this year’s political, economic and banking-system path will remain bumpy to block outperformance.

Output passed US$1 trillion in 2017, but 5% growth is below the 7% President Joko Widodo pledged after winning office. He faces a presidential election in 2019 and provincial polls this June, with rating agency Moody’s noting the calendar’s “likely slower reform momentum.” Rival Fitch upgraded the sovereign to “BBB” in December and praised monetary policy limiting volatility and capital outflows, but also cited poor government revenue collection and lingering “structural weakness.”

Widodo brought the Golkar party into the ruling coalition to advance his anti-corruption and infrastructure-development agenda, and his ally, parliamentary Speaker Setya Novanto now confronts bribery charges along with other members of the legislative and commercial elite. He has used several ruses to evade trial, although his behavior follows a 2015 pattern when a tape recording exposed an extortion attempt toward miner Freeport McMoRan.

Widodo was already in political peril after his protégé lost the Jakarta governor’s race amid allegations of Islamic blasphemy, as religious controversies continue to interfere with economic modernization initiatives including external opening of the industrial sector. Conservative clerics and protectionist advocates oppose further foreign entry to banking, where the ownership cap is 40%, despite administration overtures to China and Japan in particular.

The Indonesian government and the World Bank forecast 2018 growth in gross domestic product to be above 5% again, after commodity export recovery and increased capital spending offset tepid consumption last year. The trade surplus from sales of coal, natural gas and palm oil hit a five-year high at almost US$12 billion, expanding reserves to $130 billion to cover eight-month imports.

The budget deficit came in barely under the statutory 3% ceiling, as Finance Minister Sri Mulyani Indrawati admitted tax targets were too ambitious to raise inflows to 15% of GDP, subpar by emerging-market standards. She said stricter enforcement, combined with simpler filing procedures, would not relent during the election season, and claimed that the broader anti-bureaucracy campaign at the core of Widodo’s blueprint led to a 12% jump in foreign direct investment in rupiah terms in the third quarter of 2017.

Natural-resource nationalism is a pervasive influence smothering technocrat reassurance, and continues to scuttle the plans of multinational companies

However, natural-resource nationalism is a pervasive influence smothering technocrat reassurance, and continues to scuttle the plans of multinational companies. US miners Newmont and Freemont had to sell stakes and expand local investment, and state-owned Pertamina swallowed foreign energy assets.

To fund these acquisitions, Indonesian public and private firms have accumulated foreign debt, which was up 9% to $350 billion or one-third of GDP last year, according to the central bank. The government had $60 billion in bonds outstanding, 40% of the emerging-Asia total, as of last June, and state enterprises have jumped in with rupiah-denominated “Komodo” issues to pay for deals and infrastructure projects the budget does not cover.

Widodo’s $350 billion development package for roads, water and oil and gas quickly reached domestic limits, with credit rising annually at a cautious pace below 10%, despite cuts in benchmark interest rates through mid-2017. Banks were burned previously by state-directed corporate and personal lending, and are working to strengthen franchises with inflation in the 3-4% range and the currency steady at 13,500 per US dollar under regular intervention and tight trading rules.

Wimboh Santoso, head of the Financial Services Authority, who was formerly with the International Monetary Fund, is now on a mission to attract additional bank lines and presence outside Asia to fill the gap, and the central bank recently opened a representative office in Beijing toward this end.

The 40% international-ownership lid dates from 2012, when Singapore’s DBS Bank tried to gain control of high-profile Bank Danamon and was rebuffed. Japan’s MUFG (Mitsubishi UFJ Financial Group) in December agreed to buy it in progressive slices, first at 20% for $1 billion with an eventual goal of a complete takeover at $6 billion, provided Indonesian regulators waive the limit as they have for smaller deals.

Santoso will decide the parameters and timeline and has said he expects a “quantum leap” in products and services for approval, in contrast with the Widodo era’s small financial-sector bound to date.

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Gary Kleiman

Pioneer and recognized expert in the field of global emerging economies and financial markets. Founder of first consulting firm dedicated to providing independent analysis and advice to public and private sector clients in 1987, and research coverage and firsthand experience covers 75 countries in all developing regions. Advisor on financial vulnerability issues, risk management, portfolio allocation, and financial sector and capital markets strategy and development.

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