Commentary By Wayne Forrest

If I could have a musical score as the backdrop to this commentary, I would want it to be something upbeat, perhaps the 1933 song “We’re in the Money”.  Indonesia has a new, dynamic young leader, President Joko Widodo, with a strong reform agenda as well as operational experience at lower levels of government.  When it comes to solving business problems and eliminating red tape, Jokowi (a former furniture exporter) “gets it”.  However, at the moment a more realistic song would be Harold Arlen’s “Stormy Weather” from the same year.  A slowing economy, a challenging international economic environment, falling commodity prices, lack of unity within Parliament, and only a tiny fiscal space within which to maneuver, are the given realities.

President Joko Widodo has assembled a Cabinet that has many professionals, but it is not a bold departure from the past. The last 4 Cabinets were a similar mix of political party “appeasement appointments” as well as professionals.  No one is speaking yet about a broad vision for Indonesia’s economic future, indeed the President himself appears to be more of a troubleshooter, putting out small fires, rather than reshaping landscapes.  But, given the past when the macro vision was strong but failed at the micro level, this is a strong sign. Its the micro aspects of governance that need the most attention.

Jokowi has only been in office a few weeks and already one of his signature policies, ending the energy subsidy, has been opposed by some members of his own party, PDI-P. Rather than craft a workable coalition, PDI-P’s Parliamentary leaders are focused on a Quixotic fight to reinstate rules governing the election of the leadership (based on proportion of seats) having lost them legally in early October when the system was changed to one based on coalition voting.  The President may eventually need to move to a new party or declare himself an independent if he wants to get anything done.  The news of key members opposed to the subsidy reduction (which overwhelmingly benefits the middle and upper class as well as an oil distribution “mafia”) came as a shock and highlights a noticeable split within his party that has been apparent almost from the beginning.  It is quite clear that the senior leadership of the PDI-P has never been fully on board with a populist outsider who is new to their party.  Signs are that Jokowi will fight for his policy– it was, after all something he shared even with his opponent Prabowo.  He can authorize a price increase without Parliament, but any budget alterations (redirected spending) will need their approval.  Will the Merah Putih (Red and White) Coalition help him or take a page from US Congress and oppose even policies they support just to make the President look weak.

With prices of Indonesia major commodity exports slumping, and the prospect of the end to QE looming, Indonesia faces a situation not all that different from the 1980’s when the benchmark price for crude oil dropped from $40 to $10 a barrel. That one fact did more to push President Suharto to deregulate the economy than many realize.  Although the price drop now is less dramatic, it could help Jokowi implement structural reforms that will be necessary to advance Indonesia to the next level, one where manufacturing will take over as the main growth engine. 

The splits in Parliament between parties as well as within them are less antagonistic than they might seem.  There is plenty of room for common ground.   A Jakarta Globe op-ed writer noted: “There is no reproduction of the same conflict at the grassroots level. Thus, the current conflict in the Indonesian legislature is quite different from the similar conflict in Thailand – which had a destabilizing effect and led to the return of the military to politics.”

We will know that Jokowi is on the right track if he can eliminate or at least make a major dent in the energy subsidy by the end of the year if not sooner.  As we learned from our recent conference call with his lead analyst of the subsidy, Dr. Darmawan Prasodjo, the subsidy will be reduced once a cash transfer program for the poor is in place.  (See the event summary below) When that happens, the tune will turn happier; the government will be on the way to recovering close to $30 billion, which if allocated in part to infrastructure could help Indonesia go along way to attracting both domestic and foreign investment for manufacturing.   It will send a strong message to companies such as Foxconn (Taiwan) who has flirted with creating a $1 billion plant to produce electronics.   More importantly, it will signal that Indonesia has finally rolled up its sleeves to implement its vision to reinvigorate the slumping manufacturing sector, the key to the nation’s prosperous future.  In the era of President Suharto, manufacturing grew 8% a year, today growth is below 4% and accounts for a smaller share of GDP than it once did.  Its time to go back to the future