Indonesian President Jokowi's liberal policies are an act of necessity as the economy is experiencing a downturn. The question is how sustainable these liberal policies from a nationalist president can be.
The Jakarta Post/Asia News Network
In his presidential campaign, President Joko "Jokowi" Widodo clearly emphasised a nationalist tone with implications to inward-looking economic policies.
The platforms of the Trisakti and Nawacipta economic concepts are full of jargon referring to nationalism and self-sufficiency.
In his early months in the Cabinet, this nationalist rhetoric was very strong.
But it has changed significantly with the Cabinet reshuffles, especially with the appointment of Thomas Lembong as trade minister and Darmin Nasution as coordinating economic minister.
Previously known for inward-looking policies, they have offered more liberal policies by opening up more opportunities for foreign investment.
Actually there is a precedent in Indonesia for nationalist governments to implement very liberal policies.
During former president Megawati Sukarnoputri's term, there was a large sale of assets by the Indonesian Bank Restructuring Agency (IBRA), which held practically all of the assets belonging to conglomerates and state-owned enterprises (SOEs) as a result of the economic crisis of 1998.
Asset sales and privatisation were undertaken as an act of necessity to attract investors, especially foreigners, to buy shares of companies under IBRA control and privatized SOEs.
Mr Jokowi's liberal policies are also an act of necessity as the economy is experiencing a downturn. The question is how sustainable liberal policies from a nationalist president can be.
Previous experience shows that Indonesia took more liberal policies during the economic downturn, but then reverted to inward and nationalistic policies at better times, such as the commodity boom.
There is no guarantee that Mr Jokowi's administration will implement liberal policies consistently, considering the pressure against such policies from his own political party and interest groups who have strong links to bureaucrats.
The conflicting views among the economic team in the Cabinet continue. Protective agriculture policies against food imports for basic goods continue between the trade minister and agriculture minister.
Similarly, the fight is intensifying between the energy and mineral resources minister, who is in favour of foreign investors, and the coordinating maritime affairs minister, who favors domestic involvement over the development of the Masela gas block.
Mr Jokowi himself seems to be in favour of liberal policies and is willing to upset his own nationalist supporters.
However, the real test will come in implementation of the policies, such as whether the President will commit to significantly loosening the negative investment list or sign a contract for foreign investors in mining and oil and gas.
However, contrary to liberal policy, the recent call of the President and Vice President to lower the interest rate to a single digit has been implemented by Bank Indonesia by cutting policy rates and limiting deposit rates by the Financial Service Authority (OJK).
There is also an effort by the coordinating economic minister to further limit deposit and lending rates.
This is not a liberal policy, but a repression of commercial banking.
Pushing commercial banks to lower the interest rate has many consequences, especially whether funds will leave the banks for somewhere with higher returns.
Depositors are clearly very sensitive about interest rates.
It is understandable that lowering the interest rate helps corporations to lower costs and expand investment. But when non-performing loans rise, banks have difficulties in finding good debtors.
Otherwise, lowering the interest rate would lead to higher NPL (Non-Performing Loans). True, higher credit growth would lead to higher economic growth. But then NPL would also rise, threatening financial stability.
With the weak legal system, debtors tend to default their debts through bankruptcy and later buy back the assets at a much lower price.
What Indonesia needs is consistent open economic policy that gives certainty to both domestic and foreign investors.
Liberal policies without serious implementation would just bring disappointment for investors later on, not to mention that policy would once again revert to be inward-looking. Consistent open economic policy that facilitates investment would not only bring in investment, but also economic transformation for sustainable growth.
The response to open economic policies has been very positive so far. Capital is flowing again into capital and bond markets.
The rupiah is appreciating while other countries are experiencing pressure on capital markets and their currency.
However, this capital inflow is a lot to do with low interest rates in developed countries. When the US Federal Reserve increases its interest rate, it is very likely that capital will leave again, putting significant pressure on financial markets and depreciating the currency.
As Indonesia's private foreign debt is significantly increasing, with low interest rates abroad it pushes more foreign debt, which is vulnerable to the volatility of the currency.
Foreign private debt was US$83 billion (S$113 billion) in 2010, and increased significantly to US$168 billion in 2015. This number tends to go higher as interest rates get lower abroad.
The government should be realistic in making policies that will be implemented consistently in facilitating both domestic and foreign investments.
The response to the recent policies has been positive. This should be maintained to enable higher and sustainable growth.
Restructuring is also very important to make Indonesian corporations more competitive. External volatility is the main threat to the Indonesian financial market.
Increasing foreign private debt and higher NPL could amplify external shocks that might destabilise the financial sector.
For this reason, foreign debt monitoring and management is very important.
* The writer is a senior fellow at the Center for Information and Development Studies (CIDES) and the Habibie Center.