Indonesia Starts to Pay for its Inconsistencies

The global slowdown in trade, particularly in commodities, that has afflicted emerging economies, is combining with economic nationalism, drift and mismanagement to take its toll on Indonesia.

First-quarter gross domestic product growth fell to 4.71 percent annually, the poorest performance since the depths of the global credit crisis in 2009, compared with 5.1 percent growth a year earlier. With the latest development, the odds that the government will be able to meet its projected 5.7 percent GDP growth for the full year of 2015 are not good.

The government blamed the global slowdown as well as the lackluster performance of export destination countries such as Japan, China – whose growth fell to 7.0 percent -- and South Korea, which have all begun to slow. Officials also cited the decreasing value of the rupiah, which has been on a steady decline since 2011, and the fall in the global oil price, which skidded by 52 percent in six months before beginning to recover. Net exports by volume fell by a whopping 13.6% annually.

“Despite the slow quarter, we still think the economy will gain stronger momentum in the second half,” according to a government statement. “The combination of government spending, especially on infrastructure, and more accommodative monetary policy will help the economy. At this juncture, we still maintain our FY15 GDP growth forecast at 5.3% annually.”

That is being greeted with skepticism in the business community. While the government would like to lay the blame at the feet of its foreign trading partners – a growing tendency on the part of Indonesian officials to say it’s everybody else’s fault -- a wide range of business leaders say the government's inconsistent messages and punitive regulatory attitude is causing many investors to put plans on hold. In particular, they cite the fact that instead of President Joko Widodo being in charge, Megawati Sukarnoputri, the aging doyen of the Indonesian Democratic Party of Struggle, which backed him for election, has effectively put him in his place, telling the party's recent convention in Bali that she is in charge to a roaring crowd. Far from the decisive figure Jokowi cut as governor of Jakarta, he appears rudderless and lost and in the thrall of incompetent bureaucrats.

“Governments are going to have to redouble their efforts to cut business costs, regulations and requirements, including making foreign direct investment flows easier (President Jokowi please note). Asia cannot rely on external demand from Europe and the United States any more,” said Dr Jim Walker, the head of the Hong Kong-based financial advisory firm Asianomics.

But as Asia Sentinel reported on April 22, mounting protectionist policies mean that increasing FDI flows as Walker recommends is not in the cards. It may start flowing the other way. Indeed, according to the first-quarter figures, private direct investment in US dollar terms grew by only 1 percent on slowing FDI inflows.

"On the one hand, President Jokowi says Indonesia wants investment but the other messages are anti-foreign, protectionist and contradictory," said a foreign executive who asked not to be named. "Indonesia has to decide if it wants to be a modern economy or not. Many investors are looking to the rest of ASEAN for friendlier policies."

Banks are being forced to place their data centers onshore, mining companies are being forced to build smelting operations in the face of a ban on export of raw materials, dollar transactions are to be made illegal, which will bring the commercial world almost to a stop. One move to force Indonesian-language literacy tests on expatriates has been shortstopped. The country’s most prestigious international school, attended by the sons and daughters of the multinational business elite and many Indonesians as well, is under threat of what appears to be a specious lawsuit that could force its closure.

The Indonesia Bureau of Statistics forecast broadly-based weakness, particularly in private consumption, which accounts for 57 percent of real GDP and which Indonesian officials expected to cushion the country from external headwinds. Car and motorcycle sales contracted by 14 percent and 19 percent respectively annually. Tax collections fell by 9.6 percent annually, ahead even of the 2009 global crisis figure of 7.9 percent.

Building construction investment, which accounts for about 70 percent of total investment, is expected to ease, given that cement consumption went negative in the quarter – another indication that the business community is getting cold feet. Late government budget disbursement in particular because of early budget revision to reallocate fuel subsidy and changes in nomenclature also contributed to sluggish investment spending.