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Indonesia’s Next Leader to Inherit Fragile Economy: Finance Minister

Indonesia’s Next Leader to Inherit Fragile Economy: Finance Minister

By Novrida Manurung & Neil Chatterjee on 08:44 am Jun 20, 2014

Indonesia’s next president will need to discard election rhetoric and focus on raising fuel prices and luring foreign investment to address the budget and current- account deficits, the outgoing finance minister said.

The economy is still fragile and the incoming administration must prepare for investors pulling funds from emerging markets such as Indonesia when the US Federal Reserve starts to increase borrowing costs, M. Chatib Basri said in an interview in Jakarta on Wednesday. Presidential candidates for the July election, Joko Widodo and Prabowo Subianto, have struck a protectionist tone in campaigning, saying they will look to renegotiate some contracts with foreign investors.

Southeast Asia’s biggest economy is struggling to contain a persistent current-account deficit that helped make the rupiah Asia’s worst performer last year, while ballooning fuel subsidy costs have increased the 2014 budget shortfall and forced a reduction in state spending. The former OPEC member isn’t likely to become a net oil exporter again as production declines, leaving a long-term revenue shortfall for policy makers to deal with, Chatib said.

“There’s no way that this country can achieve 7 percent growth without being open to foreign investment, or you end up with a persistent current-account deficit,” Chatib said. “Policy would be constrained by this economic rationality.”

The rupiah has fallen 4.7 percent this quarter as the election race tightened and the trade deficit widened. The currency strengthened 0.5 percent to 11,934 per dollar in Jakarta on Thursday, according to prices from local banks, after Fed chair Janet Yellen said on June 18 that US rates will stay low “for a considerable time” after the monetary authority ends its bond-buying program.

Current account

“We need to anticipate the possibility of capital outflows from emerging markets including Indonesia,” Chatib said.

Investor concern over the currency will remain until a definitive result of the July 9 election is known, Chatib said. The current administration’s efforts to damp domestic demand and the central bank’s interest rate increases mean the current- account deficit is expected to be between 2.5 percent and 3 percent of gross domestic product this year, Chatib said. The shortfall was 3.26 percent of GDP last year.

The tightening bias will continue this year and that means the next government may see 2015 growth of under 6 percent, Chatib said. GDP rose 5.21 percent in the first quarter from a year earlier, the least since 2009, official data show.

Presidential race

Presidential frontrunner Joko has said he is confident the economy can grow more than 7 percent with improved regulations, while Prabowo, an ex-special forces general, wants to boost growth to as much as 10 percent by raising more money from capital markets and with tax. Joko’s lead over Prabowo has narrowed to about six percentage points, according to a June survey by polling company Lingkaran Survei Indonesia, down from 13 percentage points a month earlier.

“I don’t think there would be major changes to policy whoever becomes president,” Chatib said. “Both of them need to ensure they could provide jobs to reduce poverty, otherwise they won’t get the political support.”

 

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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