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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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KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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