Indonesia’s reshuffled fragile foundation
Indonesia stocks cut their year-to-date loss to 20% on the MSCI Index, and the rupiah recovered ground for a 7% decline against the dollar as President Joko “Jokowi” Widodo began a state visit to the US with a nod to Trans-Pacific Partnership entry after a cabinet reshuffle and series of economic stimulus packages. Before arrival, he gave an interview claiming his first year in office “laid the foundation” for reforms and infrastructure improvements, and cited early fuel subsidy cuts and a new Chinese $5 billion high-speed rail project. He also touted a “one-stop shop” for investment approvals and move to “e-government,” but GDP growth was only 4.7% in the second quarter, the lowest since the 2009 crisis, with the PMI under 50 and consumer sentiment turning sour. His popularity rating remains under 50% as small businesses which were the backbone of electoral support endure a business slump amid unavailable and costly credit, with borrowing rates at 25%. Foreign direct investment was the same as last year in the third quarter at $7.5 billion, as US high-tech and mining firms he plans to court are still unconvinced by incremental administrative and fiscal changes on lingering currency, inflation, commodity and balance of payments weakness.
In August the president tapped a former central bank governor close to political party chief Megawati as economy minister, and also installed a former Morgan Stanley executive as trade minister. They have rolled out regular “practical and simple” measures to slash bureaucracy and promote business, although Jokowi presents them as “massive deregulation.” Indonesian-language labels no longer need to be in place for import entry, revaluation rules for company assets were eased, and double taxation was ended for real estate investment trusts. For foreign investors visa requirements were relaxed, and oil and mineral export inspections will be less onerous. The government also seemed to backtrack on subsidies as fuel prices were cut and rice support became more generous. The president asserts that 90 regulations of the 150 under review were overhauled and that land acquisition was cleared for “strategic” projects. However broad confusion continues over many aspects, and important guidelines for the use of rupiah in domestic transactions have yet to be clarified and were further muddied by new exporter bank account tax breaks.
The central bank has also started intervening in the forward as well as spot market to keep the rupiah from drifting to 15,000/dollar. With inflation near 7%, the benchmark interest rate stands at 7.5%, and stricter capital adequacy standards were recently imposed on larger banks. Annual credit growth fell to single digits in September, with the non-performing loan ratio at 3%. Banks are the biggest holders of domestic government debt, and non-resident share has been steady at around one-third the total, but $1 billion in capital outflow was registered since August joining the equity exodus. The flight was triggered in part by an official threat of sanctions against JP Morgan after its research recommended trimming bond positions.
Private consumption remains the main economic driver as other engines sputter, especially fixed investment and net exports. According to the World Bank, the combination of low domestic demand and global oil prices narrowed the current account gap to 1.5% of GDP in the second quarter with a persistent trade deficit. It predicts that El Nino-related drought and the forest fire haze will hit agriculture and raise consumer inflation another half a percent. Another “downside risk” cited is a worse than projected Chinese slowdown which will exacerbate commodity and funding appetite, and further imperil international reserves which dipped to an estimated $75 billion on a net basis in September.
Ratings agency warnings have intensified over external corporate debt, which doubled to $170 billion since 2010, according to the central bank, with $40 billion due over the next year. Coal company PT Berau has already defaulted on US dollar bonds, and phone retailer Trikomsel will restructure Singapore dollar ones. Property developers have the shakiest foundation, Moody’s believes, as other key economic pillars still require wholesale reconstruction rather than Jokowi administration varnish to sway potential US and global buyers beyond the visit’s prepackaged deals.
Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington, D.C.
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