The Asian Voice

More reforms needed, but will Jokowi take the risk? The Jakarta Post columnist

Indonesia's President Joko Widodo during an interview with Reuters in Jakarta, on July 3, 2017.
Indonesia's President Joko Widodo during an interview with Reuters in Jakarta, on July 3, 2017.PHOTO: REUTERS

JAKARTA (THE JAKARTA POST/ASIA NEWS NETWORK) - With President Joko "Jokowi" Widodo having entered the second half of his term, it seems it could be difficult for him to achieve the desired objectives of his economic agenda by the end of his term in 2019.

Then, economic growth would be hovering at around 5 per cent, and given current conditions, there is no way it could expand to 7 per cent in 2019, as he set in his Nawacita (nine goals) campaign platform.

Investment growth remains weak. Foreign direct investment totaled only US$2.5 billion (S$3.4 billion) in the first quarter of 2017, less than half of the figure recorded in the third quarter of 2016.

The construction of many infrastructure projects has moved slowly, been delayed or is being reviewed. Electricity generation may fall short of the additional 35,000 MW target. With a lack of interest from private investors, a shortage of funding would bedevil Jokowi's signature programs in infrastructure development.

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The tax revenue target has to be lowered and the budget deficit is creeping upward, nearing the legal threshold of 3 per cent. Although the outcome of the tax amnesty was better than that in other countries, it failed to meet the government's target.

Although Bank Indonesia has kept monetary policies accommodative, bank lending growth has been weak since December 2015.

In the energy sector, oil production has fallen and the oil and gas deficit in the balance of payment has climbed. The deficit reached US$4 billion in the first half of 2017, double the figure in the same period last year.

The development of renewable energy barely got off the ground. Energy companies have been cutting their exploration budget and some have even abandoned activities aimed at finding new reserves, the last being ExxonMobil, which withdrew from the East Natuna gas block.

It is true that several reform packages, which have been issued since 2015, have streamlined and eased investment procedures. The reforms have liberalised 17 subsectors and raised the foreign ownership cap in 25 subsectors, but also imposed tighter restrictions on foreign ownership in six subsectors.

There are also 20 subsectors that remain completely closed to foreign interest, 145 subsectors that are open to foreign investment but have to partner with local firms and 350 sectors that are still subject to a foreign ownership cap.

Trade of several commodities is still heavily regulated, creating confusion in the market and opening opportunities for rent-seeking and corrupt practices, resulting in a high-cost economy for both producers and consumers.

To boost investment, the economy should be made more open in its trade and investment. But this would pose a dilemma for Jokowi.

Opening more trade and investment would definitely involve lifting some restrictions on foreign ownership rules and foreign competition. Jokowi, who is likely to bid for reelection in 2019, realises such measures would lead to criticisms by his political opponents who may claim he is overly accommodating of foreign interests.

Ideologically and politically, Jokowi is not a person who is inclined to an economic system that smacks of liberalism. And given that nationalist sentiments are running high in this country, Jokowi would certainly not be willing to run a presidential campaign in 2019 against an allegation that he is toying with liberal economic ideology. Jokowi has no commitment to any particular economic ideology. He takes a rather ad hoc approach to economic policy, exploring new ideas and listening to different opinions from different sources.

Many within the Indonesian private sector and foreign business community expected Jokowi's experience as an entrepreneur to lead him to embrace a more market-oriented and open approach to trade and investment. But Jokowi assumed power at a time when nationalist ideas were riding high. The administration of Susilo Bambang Yudhoyono inherited an economy with protectionism and more restrictions on foreign investment.

Jokowi seems inclined toward such economic nationalist ideas, which is the dominant ideological stance of Indonesian politicians and policymakers.

The statist-nationalist sensibilities of Indonesian political elites are leaving a mark on Jokowi, and he is responding to the imperatives of economic policy making in Indonesia.

His experience as a businessman has made him sensitive to any bureaucratic hurdles that obstruct the smooth operation of business. In a recent speech, he sternly warned his ministers not to issue regulations without carefully assessing its merit in improving the business climate, because this could cause confusion and disincentive to investors.

He criticised Energy and Mineral Resources Minister Ignasius Jonan, who recently issued a regulation on expanding control of companies working in the oil and gas sector. This ministry is notorious for its policy on flip-flopping in oil and gas and mineral export matters, resulting in a continued decline in investment in these sectors.

Political tension could exacerbate in 2018 as simultaneous regional elections will be held and, in 2019, the legislative and presidential elections will be held concurrently for the first time. As competition in the upcoming presidential election is predicted to be fierce, with tempers rising, it is possible political violence will flare up. Two possible consequences could arise from these situations.

First, the opportunity of making substantial economic reforms would be lost. The next phase of reforms would be more complex but necessary to boost economic growth. But it is also politically risky for Jokowi. He has demonstrated himself to be a person who is reluctant to pursue reform, opting instead to resort to political expediencies at the expense of reforms.

In his previous cabinets, ministers who were committed to reforms had been either dismissed or demoted. He knows he has worked hard to consolidate the coalition of political parties that supported him. And he does not want the political stability to be disturbed.

Second, the political tension preceding the election could spoil the investment climate, making investors wary and frightened, and obstructing further economic and investment growth.

Whether the economy achieves higher growth going forward depends on the willingness of President Jokowi to introduce more substantial and broader reforms, and whether he is willing to take the risks associated with it.

The writer is a commissioner in a publicly listed oil and gas service company.