Asia’s reform spotlight swings to Indonesia

August 22, 2014

By Peter Thal Larsen

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

The election of a fresh, charismatic leader fuels hopes for overdue change. After Japan and India, Asia’s reform spotlight has swung to Indonesia. Joko Widodo’s rise to the presidency invites comparisons with Narendra Modi in India and even Japan’s Shinzo Abe. The challenges facing Widodo – widely known as Jokowi – are more daunting. But the rewards for faster reform could be large.

There’s no doubting the dizzying speed of his ascent. A little over two years ago, Widodo was mayor of his home town in central Java. Now he leads the world’s fourth-most populous nation, with more than 250 million inhabitants scattered across an archipelago of about 18,000 islands.

His victory over former army commander Prabowo Subianto, in a campaign fuelled by social media, has reinforced faith in Indonesia’s young democracy. Widodo’s reputation as a hands-on manager, forged during his two years as governor of Jakarta province, has raised expectations that the country will finally get to grips with some of its long-running problems. The enthusiasm among businesspeople and financiers in the capital echoes the optimism that accompanied Abe’s election in 2012, and Modi’s surge to power earlier this year.

Yet in many ways the Indonesian president starts from a weaker position. The former owner of a furniture business has less experience of government than his reforming counterparts, and lacks their decisive political mandate. Widodo received little more than 53 percent of the vote, and Indonesia’s constitutional court has only just declared the result final, a month after it was first announced. Moreover, the new president’s political coalition controls less than 40 percent of the seats in the parliament. Abe and Modi took office with big majorities: Widodo has to build one.

The country’s financial position is also shaky. Slowing Chinese demand for Indonesian commodities and an ill-judged tax on exports of copper and other metals have opened up a wide current account deficit. The prospect of higher U.S. interest rates next year could make financing that gap more of a challenge. Meanwhile, Indonesia is spending more than $30 billion a year – roughly a fifth of next year’s budget – subsidising the cost of fuel and electricity.

The president’s ability to rein in subsidies will be an early test of his determination to push through sensible but unpopular reforms. Doing so will free up resources to tackle one of Indonesia’s other big problems: its shortage of decent infrastructure. Anyone who has been stuck in one of Jakarta’s many traffic jams will recognise the chronic underinvestment in transportation and logistics. In the past decade, the country has spent 3-4 percent of its gross domestic product on infrastructure each year, according to the World Bank. Even congested India invested twice as much.

The shortage of decent ports, roads and railways imposes costs on business and undermines the nation’s ability to attract industry. A commitment to improvement will help lure more cash from countries like Japan, whose manufacturers now rank Indonesia as their number one destination for investment, ahead of India and Thailand. Further benefits will flow if Widodo can make government policy less uncertain. This is particularly true in the resources sector, where a well-intentioned ban on exports of unprocessed minerals has been clumsily implemented.

Yet for all the headaches, Indonesia has some big advantages. Unlike some of its neighbours in Southeast Asia, borrowing by consumers and companies remains relatively low. The central bank has stepped in to restrict lending for mortgages and motorcycles. Government debt was just 26 percent of GDP at the end of last year – less than half the level in India.

Most importantly, Indonesia is a young country. Half the population is under the age of 30, and almost 15 million people will join the workforce between 2013 and 2020. Those demographics should give it a big boost compared with countries where the population is ageing and shrinking. However, the need to absorb those new workers also makes it all the more important that Indonesia maintains a healthy growth rate.

Investors are giving Widodo a cautious thumbs-up. The Jakarta Stock Exchange index has risen 8 percent in the past two months, far less than the market rallies that greeted Modi and Abe. Lower expectations help to reduce the likelihood of subsequent disappointment. For now, though, Indonesians – and the rest of the world – can look at the country’s new president with fresh hope.

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