Jokowi's latest Cabinet line-up faces challenging economy

Five key areas to watch after second shuffle in under two years

President Joko Widodo - Indonesia's first president to arise from outside the political and military elite - last month consolidated his power base with another Cabinet reshuffle, his second since taking office in October 2014.

Mr Joko sought to put in place a solid team to spur economic growth and speed up development. However, just 20 days after the reshuffle, his plans took a hit when Mr Arcandra Tahar was relieved of his position as energy and mineral resources minister. This followed public discord over news that he is a naturalised United States citizen.

Indonesia's citizenry law does not recognise dual citizenship.

Coordinating Maritime Affairs Minister Luhut Binsar Pandjaitan has stepped into the breach until a permanent replacement is found.

The episode pointed to a weakness in the President's administrative office.

While Mr Joko's quick response helped to ameliorate a potentially politically damaging situation, the effect on the performance of the new Cabinet remains to be seen.

As for the new Cabinet, it faces the difficult challenges of weakening economic growth, low export growth, increased unemployment and widening inequality. Indonesia's economic performance over the last year has been a cause of concern for Mr Joko, who had initially set a target of 7 per cent growth.

Workers at a textile factory in Solo, Central Java. Indonesia's labour-intensive industries such as textile and garment-making have been experiencing negative growth since the last quarter of 2014, while ceding ground to a more competitive Vietnam, w
Workers at a textile factory in Solo, Central Java. Indonesia's labour-intensive industries such as textile and garment-making have been experiencing negative growth since the last quarter of 2014, while ceding ground to a more competitive Vietnam, which has trade agreements with the EU and the US. PHOTO: REUTERS

The economy is now struggling to stay above 5 per cent - a critical threshold to keep Indonesia's 130 million workers gainfully employed.

The prognosis remains bleak. The agriculture and mining sectors remain sluggish, weighed down by lower international commodity prices. The labour-intensive manufacturing sector has been underperforming as well.

As a result, poverty and unemployment rates have been increasing. About 11 per cent of the country's population live in a state of poverty, most of them in rural areas. These challenges present an uphill task for the government to achieve its stated goal of improving the Gini ratio - an index measuring inequality - from 0.41 to 0.39 by next year.

There are five key areas to watch for the remainder of Mr Joko's presidency. The first is the unfolding of his maritime ambitions. On this front, the President is relying on Mr Luhut to deliver on his signature project, the global maritime fulcrum.

In the last two years, progress on improving port management efficiency and dwelling time has stalled. Mr Luhut has the unenviable task of getting four ministries - energy and mineral resources, maritime and fishery, transportation, and tourism - to agree on common ground.

Mr Joko's political future will ride on Mr Luhut's ability to deliver on the revitalisation of the maritime economy, inter-island connectivity, the 35,000MW electricity project and the Jakarta-Bandung high-speed railway project, most of which have a long gestation period and will be difficult to finish by 2018, a year before the next presidential election.

Second, Indonesia's fiscal management will come under greater scrutiny, especially with the return of its prominent reformer, Dr Sri Mulyani Indrawati, who was appointed Finance Minister in the recent Cabinet reshuffle.

One of the first priorities of Dr Sri Mulyani has been to tackle Indonesia's burgeoning Budget deficit, which she did by slashing over 133 trillion rupiah (S$13.6 billion) off the revised 2016 state Budget, as the tax shortfall is expected to hit 219 trillion rupiah.

Even with this intervention, the fiscal deficit will soar to 2.5 per cent of the country's gross domestic product, higher than the initial forecast of 2.35 per cent.

Dr Sri Mulyani will also have to climb an equally steep mountain to implement the tax amnesty programme and tax reform.

Indonesia has the lowest tax compliance rate in Asean, with only 12 per cent of the 250 million population registered as taxpayers, and of these, only a million file their tax reports.

Third, it remains to be seen if Indonesia will turn towards a more open economy. Dr Enggartiasto Lukita took over the trade portfolio from Mr Thomas Lembong, who went on to head the Investment Coordinating Board. While the latter is pro-market and favours the further opening up of the economy, Dr Lukita's track record is unclear.

It is important for Dr Lukita to keep trade agreement negotiations with the European Union and Australia on track, as well as committing to the Regional Comprehensive Economic Partnership.

Trade deals with the EU and US will receive added attention to stem the tide of factories relocating from Indonesia to Vietnam, which has trade agreements with these two important markets, while Indonesia does not.

Fourth, the new Minister of Industry, Mr Airlangga Hartarto, faces the significant challenge of revitalising Indonesia's manufacturing sector growth, especially labour-intensive industries such as textile and garment-making.

These industries have been experiencing negative growth since the last quarter of 2014, while ceding ground to a more competitive Vietnam. Against this challenging environment, will Indonesia's industrial policy be more open and pro-competition, or turn more inward?

Fifth, can Indonesia expedite long-overdue reforms in the mining, oil and gas sectors? In all likelihood, Indonesia will continue its mineral exports ban and push for the development of downstream industries.

The oil and gas sector, especially its upstream components, requires delicate and deft political handling. Mr Luhut's negotiating skills will be put to the test to lead negotiations and co-ordination among several ministries with the big oil companies.

To be sure, government spending will be reined in, in light of ongoing fiscal pressure.

The knock-on effects of fiscal tightening will affect the implementation of some infrastructure projects.

Other politically sensitive social programmes such as the national health insurance programme, the distribution of rice to the poor and assistance for poor students are likely to be scaled down.

The tax amnesty programme will not help matters, as its impact in the short term will be negligible.

For tax receipts to play a meaningful part in contributing to state coffers, an overhaul of the tax administration system is needed, with particular focus on strengthening the powers and reach of the tax administration office. This will need a strong political will and resilience.

Looking ahead, Mr Joko's administration will most likely adopt a cautious approach.

The President's reform credentials will be on full display - and will be tested - when the new Cabinet settles into its portfolios.

Mr Joko has taken great pains to enjoin his ministers to push forward the economic reform agenda, but he knows that in a Cabinet filled with vested interests and divided political loyalties, it will take more than words to get everyone on board. In short, the Indonesian economy may be in for a bumpy ride.

• The writer is a visiting fellow at the Iseas-Yusof Ishak Institute.

A version of this article appeared in the print edition of The Straits Times on August 25, 2016, with the headline 'Jokowi's latest Cabinet line-up faces challenging economy'. Subscribe