Primary navigation:

QFINANCE Quick Links
QFINANCE Reference

Home > Blogs > Anthony Harrington > Indonesia's political hopefuls play fast and loose with economy

Indonesia's political hopefuls play fast and loose with economy

Indonesia's political hopefuls play fast and loose with economy Anthony Harrington

Facebook LinkedIn Twitter

Having been badly rocked by financial outflows and a falling exchange rate in 2013, as a consequence of the Federal Reserve's introduction of tapering, 2014 saw the Indonesian economy surging. The Rupiah gained 7% by April 2014, becoming (probably briefly) the most stable emerging market (EM) currency, while the economy looked on track to achieve in excess of 5.6% growth, well above the regional average. However, with the Presidential elections due to be held on 9 July 2014, Indonesia's two presidential contenders are touting some really hare-brained economic policy schemes in their bid to secure votes. "Growth at all costs," seems to be the slogan espoused by both candidates.

In a Bloomberg article, William Pesek hammers the former businessman and Kopassus General Prabowo Subianto's plan to double the rate of Indonesia's borrowing, relegating it back to junk status. Subianto seems to be bringing some pseudo-corporate analysis to bear on Indonesia's debt levels, suggesting the country is "under-leveraged" at a 24% debt-to-GDP ratio, and that therefore it can borrow largely to fund growth. Subianto does not appear to have heard that a poll of analysts found that bond analysts think Indonesia is 10 times more likely to default on its debt than Malaysia or other near neighbours, despite Indonesia's lower debt-to-GDP ration. A borrowing spree could see Indonesia's borrowing rates soaring if investors feel that an incoming President is about to go on a spend, spend, spend rampage.

The other contender, Joko Widodo's "big idea" is to protect the country's banks by restricting foreign investment in them and to subject recent major trade deals to a stringent review. Oh yes, and he also wants to raise mining taxes. One only has to go to an April 2014 speech by Agus Martowardojo, Governor of Indonesia's Central Bank, to see what is being jeopardized.

Martowardojo made much of the fact that the country's current account deficit came down from the 3.85% for the third quarter of 2013, to 1.98% by the end of the fourth quarter. A stable Indonesian economy requires low and stable inflation and "a healthy posture" in the current account, he told delegates. All of this has been made possible by the fact that external investors have taken a favorable view of the way the government and the central bank have taken a grip of the country's economy. He said:

"Improved economic fundamentals, supported by strong policy [have] bolstered confidence among global investors [...] attracting foreign portfolio flows back to domestic financial markets."

Key to the country overcoming the wobbles induced by the introduction of tapering has been the fact it has seen an influx of global portfolio flows from January to April 2014 worth some US$6.9 billion. Martowardojo pointed out that the strength of the inflows drove a 7% gain for the rupiah:

"Once considered a "fragile five" currency, the Indonesian rupiah now sets itself apart as a result of preemptive and strong policy actions."

The country's two presidential candidates seem to have decided that "strong policy actions" are the way to go, without absorbing the central bank's notion of the importance of continued prudent macroeconomic policy management. True, political speechifying in the run up to an election is a rather different beast from actually running the country, but the signs at the moment are not hopeful.

And it's not just the politicians. Since Martowardojo delivered his speech in April, the central bank has trimmed its growth expectations a couple of times, the latest on 12 June. Weakening exports added to pressure on Indonesia's current account and in his latest pronouncement Martowardojo said he expected the impact of budget cuts - being made to keep the current account from ballooning - to slow growth to no more than 5.15% in 2015, sharply down from 5.5-5.9% as anticipated in his April presentation.

Of course, 5.15% is a rate of growth that Europe would love to have and is highly unlikely to see again in the near future, but Indonesia is an emerging market and as such  is held to a different standard. Jakarta is going to have to get its act together if it expects to keep up with the EM pack!

Facebook LinkedIn Twitter

Further reading on Asia:

Indonesia Country Profile
Indonesian economy hits a few speed bumps by Anthony Harrington
Emerging bond markets in East Asia on a roll by Anthony Harrington

Tags: Bank of Indonesia , debt to GDP ratio , external debt , Indonesia , Indonesia elections , leverage
  • Bookmark and Share
  • Mail to a friend


or register to post your comments.

Back to QFINANCE Blogs

Share this page

  • Facebook
  • Twitter
  • LinkedIn
  • RSS
  • Bookmark and Share

Blog Contributors