Can Jokowi Fix Indonesia’s Economic Woes in 2016?

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Can Jokowi Fix Indonesia’s Economic Woes in 2016?

The country’s president is likely to continue to face difficulties this year on the economic front.

On the sidelines of a G20 conference in Shanghai last week, Indonesian finance minister Bambang Brodjonegoro said in a Reuters interview that he is willing to exceed the 2015 budget deficit.

These comments were certainly calculated to reassure investors and concerned observers at a time when the global engines of growth are slowing, most notably China, taking its toll on Indonesia, alongside many Southeast Asian economies. Indonesia’s full year GDP growth faltered to 4.79 percent in 2015 due a lack of government spending as well as growth in investment, the slowest in six years.

Brodjonegoro also reassured international audiences with his projections of a strong rupiah between 13,200 and 13,500 against the dollar and above five percent estimations of annual growth.

One should keep in mind that such projections are highly contingent on the external macro-environment. Though private consumption contributes more than half to Indonesia’s growth each year, investment, government spending and exports make up the other bulk, with investment contributing 37 percent in 2015 and 31 percent the year before.

The operating assumption behind a 5.3 percent growth rate estimated in the national budget is that the Indonesian government will be able to raise sufficient revenue in order to pump-prime the economy through discretionary spending in infrastructural projects and village funds. In 2015, Indonesia’s budget deficit widened to 2.53 percent from the targeted 1.9 percent due to revenue shortfalls after the government only managed 82 percent of it collection target set in the state budget. Falling commodity prices deprived the government of precious tax revenue, not helped by an already weak tax base. In fact, in 2015 Brodjonegoro had to resort to extraordinary measures stay close to the target, and there were fears that the 3 percent legal limit might be breached.

This year the government is pushing for a tax amnesty bill that offers reduced tax rates to taxpayers who would report their overseas wealth. The idea is to widen the tax base and boost revenues. However this does not seem to be a viable strategy. Political wrangling over the bill in Indonesia’s parliament is set to delay the implementation of the program until year’s end, by which time the lower tax rates offered at the start of the program for wealthy individuals to repatriate wealth would have lost their allure and the government would face increasing pressure to balance its budget.

Even without pricing in the delays in the amnesty bill, finance minister Brodjonegoro has estimated downward revisions to government revenue of at least 90 billion rupiah ($6.2 billion) to account for weak commodity prices. At best, the amnesty bill is expected to raise $4.4 billion, at worst, that sum is zero if the bill is not passed this year. Given nasty inter-party politics in parliament, the latter is the more likely outcome.

If the government cannot do it, the next logical strategy is to get someone else to provide stimulus. Much has been written about President Jokowi’s hyped big-bang liberalization of investment rules last month. An overhaul of the ‘negative investment list’ is the most major change. The revisions allow 100 percent foreign ownership in previously-protected industries such as film, restaurants and pharmaceuticals while raising limits for 40 other industries such as warehousing and telecommunications up to 67 per cent.

Though a significant milestone, investment liberalization is not a panacea for current economic woes for at least two reasons. First, they may be too little too late. Early February saw island-wide union-backed protests by workers as Japanese and Korean factories announced plans to cut Indonesian jobs. Major companies such as Chevron Pacific Indonesia and Ford Motor Indonesia are reportedly planning to shutter Indonesian factories in response to falling demand. It is unclear if these reforms will be successfully able to stem this tide of discontent among companies.

It is also no secret that entrenched vested interests continue to resist these changes, even from the government. Case-in-point: the planned high-speed railway from Jakarta to Bandung to be undertaken by a Chinese company has been put on hold since Jan 2015, in part due to administrative obstacles put in place by the Ministry of Transport. Second, companies are likely to shy away from investment amidst economic uncertainty. And even if they want to invest, Indonesia’s labyrinth regulatory rules and history of abrupt policy reversals might give them pause.

A year into his presidency, Jokowi still wields immense star-power throughout the archipelago. Yet his populist budget is literally shrinking. Fiscal responsibility dictates wielding the axe on politically-sensitive items such as fuel subsidies, village fund (lauded to combat poverty and radicalism at the village level), civil service salaries and military expenditure. Strategic infrastructural projects that improve connectivity and create jobs should be prioritized, but hard budget battles await in Jokowi’s factious cabinet even on matters seemingly in the common national concern. Add to this mix the politics of the not-too-distant cabinet reshuffle where Jokowi will attempt to trade cabinet posts for party support, we find that the expression ‘having a lot of one’s plate’ is not an exaggeration for Jokowi.