2018: A Year of Red Ink

//2018: A Year of Red Ink

Looking back at 2018 one sees a year many of us might otherwise want to forget; it was a true test of Indonesia’s capacity for resilience. Amid a string of natural and human disasters; an uncertain economic environment involving the country’s major trading partners (EU, China and the US); a yawning current account and trade deficit; Indonesia managed a low-inflation, fiscally-secure growth rate of 5%. The country and the economy are on track to improve in 2019. 2018 highlights are presented first followed by a brief outlook for 2019.

Politics and Law

  • Indonesia’s anti-corruption efforts continued in 2018 but a new law (MD3) could be used to shield members of Parliament. Senior Parliament heavyweights were arrested and one was convicted of corruption. Setya Novanto (former Speaker and Golkar Party chairman who had evaded arrests several times for other infractions) finally was convicted and sentenced in one of the country’s largest scandals, involving the theft of over $100 million from a electronic identity card program. Deputy speaker Taufik Kurniawan was named a suspect in a bribery case involving a scheme to secure the transfer of funds from the state budget to a district government in Central Java.
  • Parliament passed controversial laws against the LGBT community as well as one that insulates its Members from criticism, perhaps even granting them immunity from prosecution (MD3). President Widodo did not oppose the bill as it was being drafted but did not sign it. It automatically became law and he urged a judicial review.
  • Surveys of Indonesians report an increase in the acceptance of corruption (54% say its OK) as well as a rise in intolerance (59% say they refuse to accept non-Muslims as legislative candidates).
  • 17 provinces and hundreds of districts held regional elections in June. Many involved mixed party tickets of secular moderates with more Islamic-oriented politicians. In general, moderate candidates won.
  • 2014 Presidential rivals President Joko Widodo(Jokowi), and Gerindra Party Chairman, Prabowo Subianto, built coalitions among Indonesia’s 11 main parties to contest the 2019 election. Jokowi was reportedly forced into choosing an older Islamic cleric Ma’ruf Amin as his VP running mate and Prabowo picked a young businessmen-turned-Vice Governor of Jakarta, Sandiaga Uno, as his running mate. Jokowi currently has a healthy lead in most polls.
  • Draft Law on state owned enterprises (SOE). In another example of overreach by Indonesia’s Parliament, the law would vest more decision-making in Parliament over daily decision-making in SOE’s, as well as enterprises where the government is a minority shareholder, in effect expanding its powers into the executive branch.

Security

  • Indonesia experienced two major tsunamis (Sulawesi, Sunda Straits) and a major earthquake in Lombok that killed thousands and displaced over a million people. One of the nation’s largest private airlines, Lion Air, suffered a major crash.
  • Suicide bombings by 2 families at 3 churchs and a police station in Surabaya showed that the influence of middle east-inspired Islamic extremism persists. The pain of seeing parents and their children involved in the attacks was widely felt by Indonesia’s populace.

Foreign Affairs

  • Indonesia used its ongoing economic partnership negotiations with Australia to exercise its position in support of a Palestinian state, slowing Oz’s decision to move its embassy from Tel Aviv to Jerusalem. It concluded agreements with EFTA (4 small European nations including Switzerland) and held bilateral trade discussions with Peru and Ecuador.
  • It hosted 3 major world events in Bali: IMF-World Bank Annual Meetings, One Ocean Conference, and the first World Conference on the Creative Economy.
  • President Jokowi met Vice President Pence in November at the ASEAN Summit. They discussed cooperation on freedom of navigation in the South China Sea, North Korea, agreeing on a free and open Indo-Pacific, and increasing two-way trade.

Economy

  • Indonesia’s rupiah had its worst performance since 1998, losing 12% of its value. It headed south of 15,000 but ended 2018 closer to 14,600.
  • The Jakarta Stock Index was down 2.57%. However, there were a record 57 new listings although the value was lower as many were small digital startups. Indonesia currently has 4 unicorns and expects a fifth in 2019.
  • Bank Indonesia intervened mightily throughout 2018 in response to US Fed rate increases raising its prime rate 6 times from 4.25% to 6%.
  • Sectors experiencing solid growth were the digital economy and infrastructure. One foreign consultancy believes Indonesia’s e-commerce market grew 78%, the highest in the world.
  • Indonesia’s trade deficit widened, in part due to slowed exports to major markets. Foreign direct investment was also down compared to previous years.
  • Fiscal policy emphasized stability over growth: controlling inflation, prices, and narrowing the current account deficit by curbing imports. SOE’s assumed a high amount of debt to complete infrastructure projects and nationalize mining companies. Increased tax revenues helped the government shrink its budget deficit.
  • GDP growth hovered around 5% all year. Indonesia continued to make reforms to the regulatory and investment regime. Changes to the negative investment list were marginal and not necessarily in sectors featuring high foreign demand.
  • In December, Indonesia concluded its purchase of Freeport Indonesia shares maintaining the essential elements of its 1991 contract of work that extends management and fiscal authority to its parent company through 2041. The tortuous nature of the negotiations had impacted the overall investment climate for several years and it should now improve. The $3.85 billion purchase by a SOE, PT Inalum, resulted from an international bond issue. Indonesia has not backed away from its resource nationalism, however.
  • The December 2018 linking of the major sections of the Trans Java Highway is a key milestone in the current administration drive to lower logistics costs.

2019 Outlook

  • No major government decisions will be made between now and the April 2019 Presidential election.
  • Growth will remain in its current 5-5.2% holding pattern, one that has existed since the last years of the previous Administration. A coalition of oligarchic interests maintained through Indonesia’s 5 dominant political parties resists deeper structural changes that could advance higher levels of economic growth.
  • Economic issues will dominate the rhetoric of the campaign with strong nationalist/populist messages created by both candidates. However, expect religion to be a factor.
  • President Jokowi double digit advantage in most polls is buoyed by recent lower energy and food prices, as well as “victories” such as the majority ownership over a world class asset, the Grasberg mine (Freeport) and completion of important toll roads. The President has benefited from lower world wide energy prices that have helped him maintain costly gasoline subsidies for the past two years.
  • Other policies to kick start infrastructure via SOE’s may have achieved results sooner but aggravate concerns over the future role of the private sector in Indonesia’s economy.
  • Many of the decisions he has made over the past 4 years appear to solidify his political position in a shifting coalition of parties mostly backed by oligarchic interests of one kind or another.
  • His rival Prabowo, ironically a product of the Suharto era military/business elite, already is running against them. He will paint the current administration as in league with corrupt and foreign interests.
  • It remains to be seen how much Jokowi’s reputation as a non-elitist reformer has suffered through 5 years of compromise and pragmatism. His transformation from small city reformer to a Suharto-like master pragmatist, willing to placate religious fundamentalists and a his acceptance of a large bureaucracy and state-owned sector controlled in part by political parties, is probably not temporary and will likely persist into a second term.
  • The attraction of China as model of economic development and the current US administration’s move away from its traditional position atop a global rules-based order are intertwined troubling developments for the business community no matter who becomes Indonesia’s next leader.

(The writer’s opinions do not necessarily reflect those of the American Indonesian Chamber of Commerce or its members)

By | 2019-01-07T16:11:28+00:00 January 7th, 2019|Uncategorized|0 Comments

About the Author:

Wayne Forrest is President of the American Indonesian Chamber of Commerce, a private not for profit membership organization based in NY.

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