Indonesia’s Bob Marley economy’s gonna be alright

October 19, 2012

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Wayne Arnold

It sometimes seems like every little thing is conspiring against Indonesia’s economy: poor infrastructure, political corruption, regulatory caprice and bureaucratic inertia. Falling commodity prices threaten to reverse the spread of wealth to poorer parts of the archipelago. But Indonesia’s very immaturity gives it resilience to muddle through.

The next two years promise to test believers’ faith in Indonesia. Presidential elections are due in 2014, and with the incumbent, Susilo Bambang Yudhoyono, unable to run for a third 5-year term, campaigning has already begun.  Elections are a recipe for instability: Southeast Asia’s largest economy sprawls across more than 17,000 islands, with 300 ethnic groups, 742 languages and dialects.

Campaign financing is likely to worsen already widespread corruption.  Despite an anti-corruption agency with a 100 percent conviction rate, Indonesia slipped last year from 96th on Transparency International’s Corruption Perceptions Index in 2002 to 100th. The resources boom created a bonanza for local officials empowered by a move after the fall of former dictator Suharto in 1998 to decentralize Jakarta’s control. That precipitated the rise of the almighty bupati, district regents whose licensing power can single-handedly determine the fate of big investments.

Fear of the anti-corruption campaign is also likely to intensify bureaucratic inertia. Scrupulous officials are making sure they don’t seal deals before all the i’s are dotted and t’s crossed. As a result, investment approvals have yet to recover to pre-crisis levels.

These hurdles coincide with a recent rise in resource nationalism: after years of liberalizing investment rules to lure foreigners, the boom prompted a roll-back under the current government. Concerns that rapidly growing mining investment has increased Indonesia’s reliance on exporting dirt without financing industrial development inspired ham-fisted rules requiring foreign miners to sell at least half their stakes within five years of production. It also led to a ban on unprocessed ore exports.

Falling prices for Indonesia’s key export commodities are a new worry. Coal’s 36 percent decline in the past year won’t have much direct impact on the economy; though Indonesia is the largest exporter of thermal coal, coal exports represent only about 4 percent of GDP. But the slump could hurt companies in boom towns that have borrowed to buy property and build export infrastructure. More worrisome is the 14 percent drop in palm oil, which employs roughly 4 million Indonesians, according to Citigroup, most of them in the poorest parts of the archipelago. The slump in commodities threatens to reverse an economic rebalancing that was underway just when Indonesia’s political temperature is at its highest.

Oil has gone in the opposite direction, rising 5 percent. Indonesia is an oil and gas exporter, but has to import refined fuel. The combination of rising fuel costs and capital good imports against lower export demand has helped throw Indonesia’s current account into its biggest deficit in 16 years and raised the government’s projected cost for fuel subsidies by more than 50 percent. That has helped push Indonesia’s currency, the rupiah, down almost 8 percent in the past year.

But this is not an unfamiliar predicament to Indonesia, which often seems to lurch from one crisis to another. Since the financial upheaval that toppled former dictator Suharto in 1998, Indonesia has regained a self-righting tendency. It has halved its reliance on exports, to 24 percent of GDP. And despite all its hurdles to investment, growth has averaged 5.5 percent for the past decade, unemployment has been falling since 2005 and per-capita incomes have quadrupled, to roughly $3,500.

More companies are moving into Indonesia to take advantage of one of Asia’s largest, and youngest, populations. Foreign direct investment recovered in the second quarter to $3.9 billion after two consecutive declines. Japanese carmakers, boycotted in China, are expanding production in Indonesia. Unilever is planning a palm-oil processing plant and both Foxconn and Samsung Electronics have plans to shift some production to the country.

Even Indonesia’s fractious politics lend it ballast. Democracy and decentralization, though they have worsened corruption, provide a pressure valve for social discontent. So when Yudhoyono leaves office in 2014, he will mark a watershed in Indonesian stability, becoming the first directly elected president to serve not one, but two terms, and hand over power peacefully to a directly elected successor. Indonesia is sure to remain frustrating for many investors, but don’t fret too much for it. Everything’s gonna be alright.

 

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