World Review | Indonesia faces dilemmas as election approaches

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Indonesia faces dilemmas as election approaches

Indonesia faces dilemmas as election approaches
Jakarta welcomes 2014 - election year for Indonesia (photo: dpa)
Indonesia faces dilemmas as election approaches
Indonesia and its many islands

AS INDONESIA enters 2014 - an election year which will see President Susilo Bambang Yudhoyono stepping down - its economic policymakers are keeping a wary eye on the US Federal Reserve’s monetary stimulus policy, known as quantitative easing (QE).

The Fed announced plans in December 2013 to wind down bond-buying in 2014 amid signs that US economic growth was gaining momentum.

Ministers in Jakarta worry whether the Indonesian economy – the largest in southeast Asia - could withstand the resulting large capital outflows, which could rattle the markets and undermine the national currency, the rupiah.

Indonesia has expanded at an average of six per cent over the eight years to 2013, but its current account deficit continues to widen and demand for its commodities has collapsed.

Finance Minister Chatib Basri, speaking in October, warned that Indonesia and other Asia Pacific economies should brace themselves for tapering by immediately resolving their ‘internal problems’, namely their inflation rates and current account deficits.

In Indonesia’s case, investors’ main concern was Jakarta’s current account deficit, which stood at 4.4 per cent of Gross Domestic Product (GDP) in the second quarter of 2013.

In preparation for possible pressures on the rupiah, Indonesia has expanded its currency swap deal with Japan, almost doubling the size to US$22.8 billion from US$12 billion.

On December 13, 2013, before the Fed announcement, the central banks of Indonesia and Japan announced that the expansion was aimed at enhancing stability in the financial markets and easing concerns when tapering kicks in.

Ominously, international news agency Thomson Reuters reported that the rupiah fell to its lowest level in nearly five years – just over 12,000 per dollar - on the same day.

As worries over tapering worsened, the World Bank noted that speculation about withdrawal of quantitative easing had led to stock market sell-offs and depreciation of currencies.

Indonesia, it said, was affected most, followed by Thailand, the Philippines and Malaysia.

To the credit of the Indonesian government, the central bank, Bank Indonesia, has been forthright. It warned that large capital outflows would remain a major concern even after the Fed ends its monetary stimulus programme.

For President Yudhoyono, it is vital that tapering does not destabilise the Indonesian economy as the country enters an election year. Mr Yudhoyono, who is stepping down having served the maximum two terms, wants to leave a legacy of growth and development.

The Indonesian economy entered a period of stability and growth under his presidency from 2004 after a period of uncertainty following the Asian financial crisis in 1997.

Moving forward, the government must resolve two dilemmas. The first is the need for economic liberalisation amid growing nationalism in the country.

In November 2013, plans were announced to allow foreign investors to take total control of airports and seaports as part of the further opening of the economy.

The move to relax the limits on inward investment has been criticised by the local media as opening up the Indonesian economy to greater ‘foreign dominance’ and undermining sovereignty.

The second dilemma is how to get out of an impending middle-income trap.

With a GDP per capita of US$4,790, Indonesia aspires to become a high-income economy with a figure of more than US$11,750.

Mr Chatib told an international seminar in Bali in December that signs of the Indonesian economy being stranded included its continued reliance on natural resources and cheap labour, just like Brazil and South Africa; a slowdown for five consecutive quarters; and an underdeveloped manufacturing sector that cannot cope with the rising demand from the growing middle class.

Indonesia had to go up the value chain and give more support to innovation and technology to get out of the group.

Yang Razali Kassim is a Senior Fellow with the S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University in Singapore. He previously worked in Jakarta as a journalist.

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