Indonesia Makes a Big Fiscal Bet

Daniel Moss

(Bloomberg Opinion) -- Don’t you wish you had a dollar for every beleaguered official who cried “fiscal policy must do more”? Indonesia’s President Joko Widodo actually seems to mean it.

Fresh from re-election, Jokowi, as he’s known, is aiming to cushion Southeast Asia's largest economy from a slowdown and make much-needed investments in infrastructure like roads, ports and airports, and even a new capital city. The national budget for 2020, published Friday, seeks record spending.

Indonesian growth hasn’t been terrible. The pace of GDP expansion been remarkably steady at 5% through Jokowi's first term. If this were China, people would be muttering conspiratorially that the numbers were too consistent.

The country can and should do better, though. Jokowi came to office in 2014 talking about growth of 7%. The president wants to set the bar higher and this year's budget is probably his best shot. He has more support now in the legislature, but in a few years domestic politicking will focus on who might succeed him.

Jokowi needs to make good on promises to address the woeful infrastructure that holds Indonesia back. Without an upgrade, it’s hard to see the nation becoming one of the most influential economies by mid-century. The budget is also tacit recognition that the central bank can't do it all. Bank Indonesia is a risk-averse place, even by the cautious standards of monetary policy-making.  Officials are very sensitive to the level of the rupiah and the vulnerability presented by the current account deficit. Don't look for dramatic interest rate cuts, even with global and regional monetary policy easing, as I wrote last month.

It's tempting to see Indonesia as a model for what countries can do with a bit of will and the right political climate. Other Asian governments have primed the fiscal pump with tangible results. In South Korea, state spending made the difference last quarter between growth and recession. Singapore has flagged stimulus as well. That's one of the primary tasks of fiscal policy, to step in to bolster demand.

Jokowi is attempting something different; there’s no contraction to alleviate. While lots of leaders talk about infrastructure, those aspirations rarely translate to substantive action. Indonesia’s president already has runs on the board. Jakarta's subway system finally opened this year after decades of discussions. No fewer than 25 airports are planned, along with power plants and a highway system for Sumatra modeled on the newish one running the length of Java.

One of the most fascinating parts of this budget is the idea that the deficit will be 1.76% of GDP, down from this year's estimate of 1.93% and well within the legal limit of 3%. How is this possible? It’s a little fuzzy. Part of the answer is that Finance Minister Sri Mulyani Indrawati has managed to boost tax collection, overcoming a chronic issue of avoidance. In some ways, this budget is an endorsement of Indrawati, who’s a tremendous asset for the government. Jokowi would be remiss not to make greater use of her. 

What could go wrong with all this? Quite a bit. For one thing, the external environment could deteriorate materially. Slowing global growth, economic conflict between the U.S. and China and skittish markets could foil all Jokowi’s grand plans. With its current account shortfall, Indonesia is highly sensitive to global investor sentiment and anything that may weaken appetite for the currency and its sovereign bonds, about 40% of which are held by foreigners. Sometimes this translates into bullying and even shooting of the messenger. In 2017, the government shelved business partnerships with JPMorgan Chase & Co. after the firm downgraded Indonesian equities. JPMorgan spent some time in the cold before things were eventually patched up. 

Indrawati’s ministry was a prime mover in that saga. Regardless of her attributes, she would be ill advised to repeat the performance. The global economic and market climate was far more benign in 2017 than now. Harder times bring more scrutiny from investors. Punitive responses, either in public or private, aren’t the right approach for a country with aspirations to join the top tier.

Let's applaud Jokowi's ambitions. The execution will determine whether they become a template for others. No own goals, please.



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Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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