The 10 percent jump in Indonesia’s stock market this year is a case of investors’ hopes triumphing over experience.
The coal, mineral and palm-oil exporter rode last decade’s commodities boom. Now the Chinese demand that fueled it is fading. The economy’s other engine — domestic consumption — is also slowing.
Financial investors, though, are betting on a hard reset. They hope Jakarta Governor Joko Widodo, the favorite to win July’s presidential poll, will restart stalled reforms, making the world’s fourth most-populous nation a strong contender for more investment.
Expectations were similarly high when current President Susilo Bambang Yudhoyono came to power 10 years ago. He presided over the high-growth years, but accomplished little in terms of reform. To fare better, Jokowi — as Joko is commonly known — will need a tight grip on the legislature. Next month’s parliamentary polls will determine whether he gets that wish. The party’s poor performance in 2009 is a reason to be cautious.
Besides, there is a worrying lack of urgency for reform. Last summer’s balance-of-payment wobbles have ceased. Higher interest rates have stabilized the rupiah. Now that there is no immediate crisis, the liberalization of the foreign investment regime promised late last year is also delayed.
Not only is progress glacial, but the direction keeps shifting. Last year, DBS was forced to abandon a bid to acquire control of an Indonesian lender after the central bank in Jakarta came up with new ownership guidelines that seemed tailor-made to block the Singaporean investor. This year, the government slapped a mistimed ban on exports of unprocessed minerals. Now Jakarta wants to cancel 60 bilateral investment treaties, the Financial Times reported on March 26.
Fulfilling its growth potential requires Indonesia to eschew unhealthy nationalism, check pervasive corruption and step up investment in infrastructure, health and education. It took a collapse of 8 percent-plus growth for policymakers in India to realize that it is harder to sustain a love affair with investors than to start one. A win for Jokowi could see a surge of optimism similar to the one that India witnessed five years ago. The disappointment, too, could be equally painful.