Indonesia missed its President’s target of 7% growth this year, mostly due to factors out of his control. But Jokowi is bouncing back with plans for more investment, infrastructure and reform.
By Argee Abadines, edited by Holly Reeves
There was much euphoria and hope when President Jokowi won the hearts of Indonesians in 2012. And rightly so, during his presidential campaign he declared that massive reforms were underway and Indonesia’s economy would grow at a rapid 7% a year.
But that optimism has died down as political realities and global events have rocked ASEAN’s largest economy. According to Finance Minister Sri Mulyani Indrawarti, Indonesia’s GDP for 2016 is instead projected to be a solid 5%.
The President has proved himself a smooth political player
Despite missing these hefty expectations, President Jokowi should still be commended for skillfully manoeuvring his way into the political scene in Indonesia, enjoying his highest approval ratings since getting elected at 66%.
Given that Jokowi is a political outsider, one of his biggest achievements has been managing the complex Indonesian political landscape. Starting as a minority president, he is now supported by 69% of the House of Representatives and has consolidated his power by building coalitions with major political parties such as Golkar and the National Mandate Party.
This puts him in a strong position to implement his vision of infrastructure development in the next three years of his term, especially in areas where previous administrations had not paid much attention. If he performs well, he can even consider running for reelection.
Tax reform has been a big winner but may have been over-ambitious
One of his smartest moves has been to put the highly respected and experienced former World Bank managing director Sri Mulyani into the finance ministry. Among her key projects is the implementation of Indonesia’s tax amnesty program which encourages citizens to declare untaxed assets by offering very low tax rates, yielding $7.5 billion so far. This was much-needed as Indonesia’s economy has a massive fiscal deficit. The question remains whether this will generate proper tax compliance in the future.
Despite this windfall the average growth in tax revenues for the past three years was less than 10%, and to achieve the announced economic growth target of 7%, government revenues needed 30% growth. Jokowi’s administration has only been able to grow tax revenues at 8%. He will need to do more if he wants to make a success of his optimism.
Meanwhile, the scrapping of fuel subsidies has also helped to reduce the budget deficit, as have cutbacks on spending which mean Indonesia has to rely more on private consumption and investment to drive economic activities.
His plans for equitable growth have been driven by infrastructure projects
Looking elsewhere, one of the aims of his presidency is to provide equitable growth and he has had some success. He has already inaugurated six electricity projects in Papua and West Papua and scrapped fuel subsidies to subsidise health care and education. These savings have been channelled into critical infrastructure milestones.
These projects include either building or upgrading over 150 ports, 1000 km of toll roads, and 2600 km of national highways. As a result, there will also be a high-speed railway between Jakarta and Bandung, as well as 17 new airports and 49 new irrigation plants in Eastern Indonesia.
Relationships with China and indigenous communities have improved
Jokowi has also been able to capitalise on his pivot towards China, doubling Chinese investments into his country. Foreign direct investment for his east Asian neighbour stood at $1.6 billion from January to September 2016, much of which was directed to the steel and mineral processing sectors, as well as the cement and automotive industries. This boost makes China the third-biggest investor in Indonesia, leapfrogging over the US in the process.
Economics has driven Jokowi’s foreign policy, and he began to court China early in his presidency to promote infrastructure and drive economic growth, and this seems to have gone down well at home where most people perceive Chinese involvement as positive. This heating up of a significant local relationship is similar to moves by other ASEAN nations, for example, the Philippines and Malaysia. Expect to see even more of this in the future.
He has also made progress with his campaign promise to the indigenous communities, handing out over 13,100 hectares of forests to nine such groups. These factions in society were one of Jokowi’s key supporters in his presidential run, and their needs play close to his interests in environmental issues given his background in forestry.
Significant risks to the growth targets remain
But despite the robust economic growth posted by Indonesia, there are still some misses and risks going forward. According to Enny Sri Hartati, executive director of the Institute for Development of Economics and Finance, while the unemployment rate fell, the real income of blue-collar workers such as agriculture workers dropped by 4.35%, and for construction workers, the drop was 2.28%. This forces them to seek employment in the informal sector where economic activity is not recorded.
Looking to the future, Indonesia’s GDP growth target for 2017 is 5.1%. However, this is likely to fall short says prominent economist Faisal Basri. The reason is that consumer spending is slowing down, particularly for lower income groups and middle-class consumers and this means businesses are delaying expansion plans and cutting back on production. This is a risk as consumer spending makes up 55% of the country’s GDP.
Employment and protectionism could break the President’s big plans
Meanwhile, a recent World Bank report says employment growth is now slower than population growth. As a result, poverty reduction has slowed down. Bilveer Singh, associate professor at the National University of Singapore said, “More needs to be done in terms of spreading the wealth horizontally to prevent the income gap from widening.”
The protectionist trade policies of the Trump administration also pose a concern for the Indonesian economy. If the new President follows through on his threats of throttling demand for Chinese manufactured goods, this would mean a decrease in demand for Indonesia’s raw materials. However, the risk is small as long as exports continue to comprise only a small portion of Indonesia’s GDP.
To further insulate the economy from external hazards, Coordinating Economic Minister Darmin Nasution said that they would look to implement measures that reduce the dependency of domestic industries on imports. Rows over the fertile fishing grounds in the South China Sea are another thorn in Jokowi’s side, increasing tensions with China, though Fisheries Minister Susi Pudjiastuti remains confident that those pressures are manageable.
Achieving his infrastructure and tax collection goals could set the stage for another run at office
Going into 2017, infrastructure will continue to be a top priority for Jokowi’s administration as these projects should have a trickle-down effect that brings growth in loans and domestic income, in turn, triggering more consumer spending. Goldman Sachs also sees the Indonesian rupiah as stable and less vulnerable to volatility. In fact, behind the yen, the rupiah was the second best-performing currency in 2016.
If Jokowi’s government can implement effective tax reforms to boost tax revenue collections, it will strengthen their fiscal position for his remaining three years and allow him to implement his economic policies. If successful, this would mean more jobs for Indonesians thanks to increases in investments to attractive infrastructure projects. His plans also hope for more competition among businesses – bringing better products and services at lower prices.
The youthful leader started his term with very high expectations but has suffered from global factors out of his control, such as a fall in commodity prices and China’s economic slowdown. But he is a fast learner and has bounced back confidently. Our prediction for 2017 is another stable turn for Indonesia. Not exceptional, but very solid. And if he can pull that off, we are likely to see Jokowi’s re-election in 2019.