Problems deferred become millstone for Indonesia

Problems deferred become millstone for Indonesia

September 21, 2013

Tim Colebatch

Indonesia has been one of the five strongest sources of global growth since the GFC hit in 2008. But now its failure to reform its economy and tackle its infrastructure backlog has seen it take a dumping on global markets, as its economy slows, and inflation and its trade deficit rise. And with a new parliament and president to be elected in 2014, the future of one of the world’s biggest developing economies could be clouded for some time, the Australian National University’s annual Indonesia update has been told.

Indonesia’s new Finance Minister is an ANU economics graduate, Chatib Basri, who said last year that Indonesia’s three top priorities were ”infrastructure, infrastructure, and infrastructure”. But Jakarta economist Moekti Soejachmoen said little had been done to improve the country’s ports, roads and rail, while President Yudhoyono’s government still spent more on fuel subsidies than it did on education and health combined.

Bambang Haryamurti, editor-in-chief of the acclaimed Tempo magazine, warned that a recent claim by trade unions for a 50 per cent rise in the minimum wage was adding to pressures already slowing the economy and hiking up prices.

The head of federal Treasury’s domestic economy division, Jason Allford, just back from two years in Jakarta, said growth had now slipped to a three-year low, while inflation had jumped above 8 per cent, the rupiah had slid more than 15 per cent, and its current account deficit was a record $US40 billion ($42 billion) a year.

But Mr Allford sounded a note of calm, saying the Indonesian economy was still strong, after a decade of growth averaging 6 per cent a year. He said private and public debt was now much lower than it was before the 1997 Asian financial crisis, and fiscal and monetary policy were well-managed. He blamed the rupiah’s slump partly on the markets themselves.

”Did the financial markets not know that the US was going to have to normalise monetary policy at some point?” he asked. And he also faulted Indonesia’s failure to reform its spending priorities, labour markets, competition policy and state-owned enterprises, to make its economy ”more robust” in whatever circumstances it faced.

Dave McRae, of the Lowy Institute, said Indonesia’s new president in 2014 would probably be a reformer.

The popular Jakarta governor, Joko Widodo, is the frontrunner, ahead of ex-general Prabowo Subianto. But it was still unclear what any of the candidates’ policies would be.

Dr McRae said it was also unclear whether Mr Widodo would be allowed to run, since his party was controlled by the former president Megawati Soekarnoputri.

She has yet to rule out standing again, and other party leaders also have presidential ambitions.