Indonesia vows to turn crisis into opportunity

September 11, 2013 7:18 am

Indonesia vows to turn crisis into opportunity

By Ben Bland in Jakarta

Indonesia’s central bank will on Thursday come under pressure to hike interest rates for the second time in two weeks in a bid to prop up the rupiah, which has been caught in the global emerging market sell-off. The currency’s slump against the dollar is not the only problem faced by Indonesia’s policy makers, both in government and the nominally independent central bank. Economic growth is decelerating, inflation is rising and investors are anxious about next year’s presidential election, which will see the first transfer of power in a decade.But Indonesia’s finance minister is undaunted, insisting he can turn crisis into opportunity, pushing through investor-friendly reforms and rolling back damaging, protectionist measures.

“From my side this is the best time to do reform,” Chatib Basri told the Financial Times. “Not many people realise that we had the same problem in 2008, just before the last election. You’ll be surprised. If we are in a crisis, we can unite.”

Fears that the US Federal Reserve will soon begin to “taper” its monetary stimulus programme have prompted a sharp sell-off of assets in emerging markets suffering from wide current account deficits including Indonesia, Brazil, India, South Africa and Turkey.

Mr Basri, an Australian-educated economist, joined officials from Brazil, India and other emerging economies at last week’s G20 meeting in calling on the US to communicate its intentions more clearly or risk undermining the nascent recovery in the advanced economies.

In contrast, many international economists and rating agencies have insisted that the recent capital outflows from emerging markets are merely a symptom of the deeper domestic problems faced by countries that are reliant on foreign money to fund their current account shortfalls and have been slow to implement much-needed structural reforms.

The International Monetary Fund recently downgraded its forecast for Indonesia’s gross domestic product growth for this year from 6.3 per cent to 5.25 per cent, citing “sluggish external demand and the investment outlook”.

Robert Prior-Wandesforde, an economist for Credit Suisse in Singapore, believes that the Indonesian authorities have been persistently over-optimistic in their forecasting and that the central bank has failed to get “ahead of the curve” of increasingly negative investor sentiment.

“If you’re continually in reactive mode, you end up being forced to tighten [monetary policy] more than you’d otherwise have to,” he said. “Indonesia is going through a forced but necessary process of adjustment. We’ll see two-three years of sluggish, below-trend growth but it’s only natural after several years of above-trend growth.”

While Mr Basri acknowledged that some of Indonesia’s difficulties were homegrown, he dismissed the suggestion that the country of 250m people was headed for an extended period of slower growth, sticking by the finance ministry’s GDP growth forecast of 6.3 per cent for this year and 6.0 per cent next year.

But he said that, if Indonesia is to reach the more rapid levels of economic growth attained by China and Vietnam during their boom years, it will have to open up further to foreign investment and make some headway on ambitious but long-stalled plans to revamp the country’s ailing infrastructure.

Hostility to such reforms from the tight-knit political and business elite saw two of his reform-minded predecessors – Sri Mulyani Indrawati and Agus Martowardojo – ousted from the finance ministry in the last three years.

But Mr Basri, who was one of the sternest critics of the government’s protectionist economic policies before joining the cabinet as the investment tsar in June 2012, said he was determined to push ahead in the face of such opposition.

As part of a package of measures designed to reassure nervous markets, he has already announced plans to open up new sectors of the economy to foreign investors and cut back trade restrictions that have riled companies and governments from Thailand to the US.

Such measures are unlikely to have any immediate impact on Indonesia’s current account deficit but are necessary to “send a message” that the government is serious about tackling the problem, according to Mr Basri.

Yet, many investors remain sceptical given the government’s poor record of implementing policies.

In response, the poacher-turned-gamekeeper is trying to change a deeply-embedded, Soviet-style bureaucratic culture that prioritises overambitious masterplans over action.

“We have to end this culture,” Mr Basri said. “We should not say we’d like to plan this but we should say we’ve already implemented this. Now I’m here [in the government], I can’t criticise so I have to prove it.”