Indonesia Facing Internal Doubts as Global Risks Rattle Outlook

Karlis Salna and Viriya Singgih

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Indonesian President Joko Widodo is facing an uphill battle to make good on an ambitious reform plan with a rapidly deteriorating global outlook prompting doubts, including from within his own government, over growth projections for Southeast Asia’s biggest economy.

Despite acknowledging mounting risks, Widodo will head into his second term having handed down a budget at the heart of which is a forecast for growth next year of 5.3%. If realized, it would be the fastest pace of expansion in seven years. The 2020 outlay ramps up spending to an all-time high of 2,528.8 trillion rupiah ($178 billion), while also projecting a narrower fiscal deficit.

Yet, within hours of the budget being delivered Friday, the government was already expressing doubts over its own projections, underscoring the depth of anxiety among policy makers around the world toward fresh volatility, waning demand and an escalating trade war.

Citing growing uncertainties in the global economy, and the possibility of recession in some countries, Finance Minister Sri Mulyani Indrawati said the numbers outlined in the budget were not “fixed.”

“We see there is a downside risk, namely weakening global economic growth,” Indrawati told reporters at a post-budget briefing. With exports having slumped for a ninth month and the growth forecast for this year having already been trimmed, she said the global environment and “even some countries experiencing recession” meant it “might be difficult to accelerate” growth in 2020.

“The global environment will bring uncertainties,” Indrawati said. “The question is whether the domestic sources of growth can offset that.”

Second-Term Shadow

The president, known as Jokowi, wants to spur an economy that has been hovering around the 5% mark for several years. Yet, as he prepares to be sworn in for another five years in October, he faces a global downturn that is threatening to cast a shadow over his second-term agenda.

The economy expanded 5.05% in the second quarter, its slowest pace in two years, and is forecast to grow 5.2% for all of 2019. That’s well short of historical marks and a long way off the 7% growth Jokowi promised, but never delivered, in his first term.

Analysts have also raised questions over projections contained in the budget.

“Sometimes we need optimism,” David Sumual, chief economist of PT Bank Central Asia in Jakarta, said of the 2020 forecasts. “But if you ask if it’s realistic, I think we can see that external factors will play a major role.”

“It’s counter-intuitive that the government expects higher growth but also plans for the deficit to be lower,” he said. “And we can’t expect much from non-tax revenue either with commodity prices still quite low.”

Enrico Tanuwidjaja, head of economics and research for PT UOB Indonesia in Jakarta, said Jokowi’s growth target is “quite optimistic” given the global outlook. Even 5.2% in such an environment “would be an achievement," he said.

Darker Days

The record budget comes as governments around Asia look to support their economies in the face of a darkening global outlook. Thailand on Friday pledged a $10 billion package of spending and loans to juice growth to 3%, a day after Hong Kong committed to $2.4 billion in stimulus spending amid a spiraling political crisis.

Still, Jokowi presented an upbeat outlook, and said a “positive perception about Indonesia” would see investment continue to flow into the country. While other economies are slowing, Indonesia’s “must be able to grow” and any crisis “must be turned into an opportunity,” he said.

The budget includes a record 419.2 trillion rupiah for infrastructure, up from 399.7 trillion rupiah this year. Projects include 837 kilometers (520 miles) of roads and 238.8 kilometers of rail lines, as well as three new airports.

While he is set to push on with the massive infrastructure drive that was a hallmark of his first term, Jokowi has also turned his attention to boosting manufacturing and productivity. On Friday, he unveiled steps to increase exports -- flagging plans to develop processing industries for a range of commodities -- after Indonesia posted its worst trade deficit on record last year.

--With assistance from Arys Aditya and Eko Listiyorini.

To contact the reporters on this story: Karlis Salna in Jakarta at ksalna@bloomberg.net;Viriya Singgih in Jakarta at vsinggih@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Stanley James, Shamim Adam

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