American Indonesian Chamber of Commerce


Outlook for 2015: Cautious Optimism

Commentary by Wayne Forrest

Since taking office in October President Jokowi has not waited for Parliament, using his executive powers to reset Indonesia’s course. He is turning out to be savvier then many gave him credit for.  2015 could mark the beginning of a positive new chapter in Indonesia’s economic development.   Although only a short amount of time has elapsed, Jokowi’s legendary problem solving abilities have already been on display.  Economically, he has cleared some fiscal space by lowering (and then eliminating) energy subsidies; politically, he has neutralized –at least for now– the opposition forces (led by rival Prabowo) through clever maneuvering; and diplomatically, he has asserted Indonesia’s maritime priorities and need for foreign investment in well received appearances at the APEC, G20 and ASEAN summits. A fractured Parliament has not sat much since October; come January Jokowi will likely bring his own budget forward for its approval.  It may be the first true test of his political leadership. He should be able to pass it and redirect upwards of $20 billion to infrastructure, health, education and military hardware.  But although things may be going well for Jokowi so far a cautious optimism characterizes the outlook for 2015.   Here is my take on the year ahead:

The head of Indonesia’s Chamber of Commerce, Suryo Sulisto, told me Jokowi may be Indonesia’s most pro-business President yet.  One of his first unannounced visits was to BKPM, Indonesia’s Investment Coordinating Board.  A favorite tactic of his, Jokowi has used them (blusukan in bahasa) to shake up bureaucracies and rid them of non performers.  Knowing how long it can take for investors to get the required licenses and permits, Jokowi is intent on getting every ministry to place a representative in BKPM to truly make it a “one stop shop”.   If he can pull this off it will be a signature achievement.   I give him better than a 50/50 chance.

But investors need more than a responsive bureaucracy. They need to see a healthy economy and an investment climate that’s as competitive as India, China, and the rest of ASEAN.  Here Jokowi’s predilection for serving Indonesia’s “interests” could hamper the country’s move to join global supply chains for intermediate manufactured products.  The cautious part of the optimism will revolve around this central issue.  

We can expect final GDP growth to be 5.1% for 2014;  2015 will be better, closer to 5.4%.  Jokowi’s economic planners have set their 2019 goals and GDP will rise to 7% by then.  (Click here to see them in a chart format).  This is certainly a reasonable but not overly ambitious goal.  In my December meeting with Finance Minister Bambang Brodjonegoro, he predicted 4.5-5% inflation, and a fall in debt to GDP to 30% from 35%. Given the plunge in the rupiah’s value his greatest concern is the large amount of dollar denominated private debt.  Its clear he is preparing a possible shift to more official, multilateral debt as a backstopping measure. Clearly Indonesia would do anything to avoid another “sovereignty impingement ” (i.e. IMF loan).   Along with an excellent former Finance Minister (Agus Martowardoyo) at the helm of Indonesia’s central bank, Brodjonegoro will maintain the conservative macroeconomic policies that long ago established Indonesia as a primary emerging market. 

Jokowi should be able to win Parliamentary approval to increase spending on infrastructure and now that implementing rules are in place for the 2012 Land Law, the government will be able to move much more quickly to clear land for a backlog of power and port projects as well as railroads and toll roads.  Less clear is how Jokowi’s government will handle other obstacles to creating more value-add manufacturing: rigid labor laws, high minimum wages, high tariffs for many components.  More than likely we will see a mixed picture with elements of protectionism in place that run counter to the welcoming hand Jokowi has extended to foreign investors.  In its zeal to preserve the rupiah’s value Indonesia has become overly concerned with its negative balance of payments.  So far, many departments are continuing “keep money at home” policies begun under the previous government that present difficulties to foreign as well as some local companies: inefficient reinsurance rules that redirect premiums to local state-owned companies, possible lowering of foreign equity in banks, maintenance of mineral export bans and demands for local smelters, uneconomic food security policies that raise prices and decrease supply.  Jokowi’s high publicized efforts to clean up the Energy Ministry and Pertamina –which should enable quicker decisions on new projects–would be of greater usefulness if it were also coupled with wholesale reform of the Attorney General’s office and the dropping of criminal charges against Chevron and other companies for essentially civil matters. (See Chevron story on page 4)

At the end of 2015 the full integration of an ASEAN Economic Community (AEC) is supposed to occur but Jokowi has already been quoted -regarding the AEC- that he will look to preserve Indonesia’s “interests”.  Many questions will need to be answered.  For example: will Indonesia  facilitate work visas for foreign educators, engineers and health professionals or keep barriers in place. For an economy lacking in highly trained educators, engineers, technicians, accountants, aviation mechanics, doctors, and nurses a lack of policy vision regarding AEC (cherry picking only the planks everyone likes) could prove costly in terms of missed opportunities for growth.

Bottom line: an improving macro picture and better fiscal management (elimination of energy subsidies, budget austerity) may win an investment grade rating from S & P and attract back capital market investors but lack of clarity in micro policy will continue to send mixed signals to foreign direct investors. 

The Presidential campaign of 2014 was the first in Indonesia’s history to feature American-style election practices such as issues-oriented TV debates as well as negative campaigning.  Never before had Indonesia’s electorate seen outright character assassination, false rumors, and outright lies thrown by one candidate’s team at the other.  The losing candidate, Prabowo, and his supporters were the guiltiest of these practices and they went to great lengths to challenge the results that were closer then had been expected.   His coalition (KMP) holds about 60% of seats in Parliament and Jokowi’s (KIH) has 40%.  But looks can be deceiving.  The largest party withing KMP,  Golkar, is seriously split, and two others, PD and PPP could easily side with KIH on key votes.  The usual script in Indonesia would have the “opposition” groups (especially Golkar, which never wants to be “out of the government”)  falling basically in line with parties supporting the President in some loose coalition.  This hasn’t occurred yet causing some I met in December to speculate that something akin to what happened to President Wahid– whose mandate was removed by a vote in the People’s Assembly in 2001 after less than 2 years–may be afoot. If there is to be a serious attempt to unseat Jokowi it will likely be in the form of charging him with overseeing some type of corrupt deal with Chinese communists, a time-honored mantra in Indonesia that reared its ahead during the campaign. 

But Indonesia’s democracy has evolved since Wahid’s time and an impeachment scenario seems unlikely. But like Wahid, Jokowi is basically an outsider whose reform efforts could prove destabilizing to certain members of the commercial, military, and bureaucratic elite. It was direct elections –enabled during Megawati’s Presidency and rolled out by her successor SBY– that brought Jokowi to power.  The elite closed ranks at the end of SBY’s term –to prevent more “Jokowis”–and passed a law to end them.   Right before he left office SBY did one of his patented flip flops and reinstated them by decree after widespread public outrage.   In the weeks ahead the issue will come before the legislature who will vote whether to let the decree stand or not.   If Jokowi wins this vote (preserving) direct elections, as I believe he will, it will probably signal the end of Prabowo’s strong influence over the KMP. 

But beyond the election law issue, during 2015 Jokowi will be navigating relations with his own party, PDI-P, whose chairwoman, former President Megawati, must be offered a certain degree of respect.  Jokowi is the first President in Indonesia’s who does not head his own party (or have a high position within it).  The benefit of this is that he is more accountable to the people who elected him at the possible cost of difficulty wielding the power needed to bring about reforms.  But I am very encouraged that Jokowi has already overcome PDI-P’s natural objection to ending energy subsidies.  Another sign of a growing independence is his recent appointment of Luhut Pandjaitan as his Chief of Staff.  When I met him in December Luhut told me Jokowi would not hesitate to replace under-performing or corrupt Ministers.

After PDI-P’s 19% of seats in Parliament, the next largest faction is Golkar (14%), technically part of the opposition (KMP) coalition.  Towards the end of 2014 an insurgent group of younger Golkar cadres failed in their attempt to unseat long time patron and Chairman Aburizal Bakrie, who successfully won a second five year term. Their unhappiness with unilateral moves by Bakrie now looks like a serious rift.  Combined with the reports of those who have met Prabowo personally that he seems to lack energy for a concerted opposition effort, Golkar’s internal problems should bode well for Jokowi.

Bottom line: expect Jokowi to consolidate a working Parliamentary majority by mid 2015 if not sooner.

Overall outlook: Indonesia’s growth trajectory –falsely inflated by high commodity prices (2006-2010) and US Fed easy money policies– can only move towards 8% (where many experts believe it should be given its large and mostly young population and growing middle class) if its leaders fully embrace a market economy with minimal government intervention and make strong efforts to embrace foreign investment and lower logistics costs.  Some but not all of President Jokowi’s policies (at least those that we know of at this early stage) will get the nation there. Clearly continuing on with the highly politicized protectionist policies of the past will not.  Defining what is a national “interest” will be a key, and hopefully these will help the greatest number of Indonesians attain better, more productive jobs.