Thursday, October 20, 2016

Indonesia’s Widodo's weak points may yet sink the popular president

From local politician to leader of one of the world's most populous nations, Indonesian President Joko Widodo has enjoyed a wave of popular support, buoyed by his clean image and promises of economic growth. But delayed infrastructure development and intractable deficits could derail his hopes of re-election in 2019.

In an opinion poll conducted in October by Indonesian think tank Centre for Strategic and International Studies, 66.5% of respondents said they were happy with Widodo's government, a significant increase from 50.6% a year before. The reason for the uptick was an economic recovery, albeit a slow one. The Indonesian economy expanded 5.2% on the year in the April-June quarter in real terms, greater than 4.9% in January-March. Far from representing a self-sustaining recovery, however, this accelerated growth is thought to be due mainly to the government moving forward some of its planned spending.

Indonesia has been struggling with both a current-account deficit and a budget deficit. To remedy this, Widodo appointed Sri Mulyani Indrawati, an economist and then-managing director and chief operating officer at the World Bank, as finance minister in July in his second cabinet reshuffle. She last held this position six years ago.

Indrawati introduced a leaner budget for the year ending December 2017. Estimated expenditures total about 2,070 trillion rupiah (roughly $160 billion) and revenues 1,740 trillion rupiah. Though this budget still entails a deficit, it is scaled down from fiscal 2016. Indonesian law requires the current-account deficit to be kept within 3% of gross domestic product, and the new finance minister is eager to maintain fiscal discipline.

Indrawati is also stepping up tax-collection efforts. A tax amnesty program introduced in July allows residents who have undeclared taxable assets to qualify for lower tax rates if they declare those assets to tax authorities. The authorities had estimated a 165 trillion rupiah increase in tax revenue by March 2017, but about 60% of that figure had been collected by September 2016, a sign that having Indrawati's name attached to the program has helped gained taxpayers' trust.

Meanwhile, there has been no improvement in current-account figures. Indonesia's current-account deficit equaled 1.92% of GDP in July-September 2015, and it has been over 2% for the third straight quarter since October-December of that year.

To reduce its current-account deficit, Indonesia will need investments from other countries that help expand exports. Improving infrastructure will be critical for attracting foreign businesses, as Widodo well knows. Shortly after becoming the president, he pledged to carry out some $500 billion in infrastructure development projects by 2019 -- but there have been many delays.

Under pressure

On Sept. 13, at the opening ceremony of a new container terminal at Tanjung Priok port in northern Jakarta, Widodo said the race to attract more investment is heating up and that he is pressed for time. Cabinet members and other officials spoke proudly about how the new facility will shorten dwell time in port from about seven days to about three days, but Widodo asked them to shorten it further, to about two days.

In late September, he visited the construction site of a MRT (Mass Rapid Transit) in Jakarta and asked those responsible for the project to make sure it will be completed in 2019 as planned.

Projects are underway to build power plants with a total capacity of 35,000 megawatts, but construction has started on only a handful of them. These include a large coal-fired thermal power plant in Batang, Central Java, being built by Adaro Power, a local company, and Electoric Power Development (J-Power) and Itochu, Japanese companies. Meanwhile, a Chinese-led high-speed railway project to connect Jakarta and Bandung, West Java, broke ground in January, but there has been little progress since.

In early October, Widodo sent Luhut Pandjaitan, coordinating minister for maritime affairs and a confidant of the president, to Japan to meet with Prime Minister Shinzo Abe and other officials. They discussed various projects Japan and Indonesia have been cooperating on, including the construction of a port in Patimban, 120km east of Jakarta, and the refurbishment of a railway connecting Jakarta and Surabaya. They also decided to introduce a system that allows official development assistance from Japan and other countries to be used in the development of Java, for which the Indonesian government had initially planned to use private investment.

The rupiah's exchange rate and stock prices on the Jakarta market remain stable, but some market observers believe that investment money is returning to Indonesia and other emerging economies only because low interest rates are discouraging investment in developed countries. If the U.S. Federal Reserve goes ahead with an interest rate hike in December, the flow of money may change dramatically.

Shinobu Kikuchi, a senior economist at Mizuho Research Institute, said: "Even though the exchange rate and stock prices are stable, Indonesian authorities are not optimistic about the economic outlook. They are concerned about the ongoing budget deficit and current-account deficit, which overseas investors watch closely."

Savvy moves

Widodo's re-election strategy hinges largely on attracting more investment and creating more jobs while his popularity is high. When he became president two years ago, there were rumors of conflict between Widodo, a member of the ruling Indonesian Democratic Party of Struggle, and Megawati Sukarnoputri, former president and head of the party. But in his twice cabinet shake-ups, he made sure to remove anyone who might become a political foe in the future and cemented the foundation of his own leadership. In May, the main opposition Golkar Party joined the ruling coalition, giving them combined control of 70% of the seats in parliament. Widodo concluded that an alliance would be necessary to ensure the stability of his government.

Widodo shows the same kind of pragmatic approach in his diplomacy. Under its "nine-dash line" premise, China claims jurisdiction over almost all of the South China Sea. Widodo, in line with public sentiment in Indonesia, has started expressing more concern about Beijing's moves, but he has refrained from openly critical remarks. He knows that Indonesia is geopolitically important to China's "One Belt, One Road" infrastructure initiative and stands to receive huge investment from the country.

Chinese fishing boats are operating in Indonesia's exclusive economic zone around the Natuna Islands, in the southern end of the South China Sea. Beijing claims this area is part of its "traditional fishing ground," even though it acknowledges that the islands themselves lie outside the nine-dash line.

In June, Widodo and certain cabinet members held a meeting on a warship anchored off the Natuna Islands and discussed how to deal with the situation. Widodo attempted to raise the morale of the ship's crew by writing a message calling on them to defend Indonesia. This seems to have won support from a public increasingly nervous about China's actions.

Will Widodo's re-election strategy prove effective? Anies Baswedan, who was removed as education and culture minister in the July cabinet reshuffle, is drawing attention as a rival candidate. One ruling party official said Widodo pushed Baswedan out of the cabinet because he saw him as a potential political foe. That move may prove to have been unwise: At the end of September, Baswedan declared his candidacy for the Jakarta gubernatorial election set for February 2017. If his bid is successful, he could then use his position as governor of Jakarta as a stepping stone to the presidency -- just as Widodo himself did.

Nikkei Asia Review


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