Not So Fast: Why Indonesia Could Miss Growth Target in 2015
by Andrew Janes
5:00 AM WIB
February 4, 2015
(Bloomberg) -- Indonesian
President Joko Widodo says Southeast Asia’s biggest economy can achieve the
official growth target of 5.7 percent this year. That could be a taller order
than he anticipates.
Widodo, who took office in October, inherited an economy
fettered by years of under-investment in infrastructure, plunging commodity
prices and the withdrawal of U.S. monetary stimulus. The central bank has kept
monetary policy tight to protect a vulnerable rupiah and gross domestic product
probably grew 4.9 percent last quarter from a year earlier, the slowest pace
since 2009, according to a Bloomberg survey.
The president, known as Jokowi, is promising to rev things
up by fast-tracking large road, port and power projects and cutting red tape.
He’s seeking to woo investment and boost non-commodity exports, targeting an
expansion of as much as 6.3 percent to 6.9 percent next year.
“We are confident to
have the target of our economic growth” of 5.7 percent this year, the president
said in a Feb. 2 interview in Jakarta. “But we must increase our exports volume
and we must reform our bureaucracy. We must invite FDI.”
Yet the World Bank sees Indonesia growing 5.2 percent this
year and 5.5 percent in 2016. The economy probably expanded 5.06 percent in
2014, according to a Bloomberg survey ahead of data due Feb. 5 in Jakarta. Here
are five things that could stand in the way of Indonesia’s growth goal for this
year.
Commodity
Prices
The prices of Indonesia’s key commodity exports may not
recover anytime soon. Coal has fallen further this year and has now more than halved
in price since the end of 2010. Palm oil capped the biggest January decline
since 2010 as demand weakens amid a supply glut, after slumping 16 percent in
the past year.
While the plummeting price of crude presented Jokowi with an
opportunity to scrap gasoline subsidies, it will also sap government revenue.
The state will lose about 158.8 trillion ($13 billion) of
revenue because of the drop in oil prices, according to a Nomura Holdings Inc.
research note last week by economists including Euben Paracuelles in Singapore.
That negates much of the 230 trillion rupiah of budget funds freed up by the
fuel subsidy overhaul.
Sticky
Deficit
Indonesia was dubbed one of the fragile five emerging-market
economies by Morgan Stanley in 2013 because its large external deficit made it
vulnerable to capital outflows. While the shortfall in the current account has
narrowed from a record 4.4 percent of gross domestic product in the second
quarter of that year, Bank Indonesia is forecasting a deficit of 3 percent to 3.5
percent of GDP this year, compared with an estimate for about 3 percent in
2014.
The big infrastructure projects being promised by Jokowi
could spur imports, putting pressure on the balance, according to Ndiame Diop,
the World Bank’s lead economist for Indonesia. This persistent deficit makes it
more difficult for Bank Indonesia to follow global peers in cutting borrowing
costs to bolster economic growth.
Standard Chartered
Plc said most of its Indonesian clients see the central bank holding or
increasing its policy rate in 2015, according to a note released Feb. 3.
Implementation
Risks
The stand-off between Indonesia’s police force and its
anti-corruption agency, the KPK, has dominated local media in recent weeks. A
failure by the president to show strong leadership could undermine his
credibility for pushing ahead with economic reforms and cracking down on graft.
“There could be a
rippling effect,” the World Bank’s Diop says. He also points out that about
50 percent of the central government budget is actually managed by sub-national
governments, raising the possibility that the implementation of infrastructure
and social spending will be slower than expected because of the difficulty in
transmitting policy from the top.
Global Risk
The global economy is unlikely to provide much support to
Indonesia this year, with weaknesses in Japan, Europe and China, Indonesia’s
largest export market. Meanwhile, a recovery in the U.S. is forecast to prompt
the Federal Reserve to raise interest rates, reducing the appeal of
higher-yielding assets in emerging markets like Indonesia.
“This is going to be
a very tough year externally,” Mari Pangestu, a former Indonesian trade
minister, said in an interview with Bloomberg Television on Wednesday.
A strengthening U.S.
economy and slowing growth in China is a “bad combination” for Indonesia as
commodity prices will probably keep falling, said Benedict Bingham, the
International Monetary Fund’s senior resident representative in Jakarta.
Time Lag
The economic overhaul being promised by Jokowi could take
time to benefit the economy. Large infrastructure projects may take a while and
the goal of lifting non-commodity exports is dependent on increasing the supply
of skilled labor.
“Whether we can
actually roll out the infrastructure projects fast enough is really the big
question mark,” said Pangestu.
The government also
needs to review its trade and labor policies, which look more defensive rather
than focused on winning global market share, according to Bingham.
“2015 needs to be seen as a year in which the foundations for
the medium-term strategy are set,” he said. “It’s not going to be a year where
the pay-off from this strategy is going to become immediately apparent.”
