Cracks emerge in Yudhoyono's
facade By Gary LaMoshi
DENPASAR - Indonesia has been running its
own version of the China bargain. In exchange for
economic growth, Indonesians have largely agreed
to overlook the government's failure to deal with
other pressing issues.
Now, with the
prospect of slowing growth, President Susilo
Bambang Yudhoyono's administration needs either to
find new ways to boost the economy or show some
long overdue leadership.
Indonesia's gross domestic product (GDP) rose
6.4%, the fastest since 1996, the year before the
Asian financial crisis hit. Last year's
fourth-quarter growth rate of 6.5% marked five
straight quarters of economic growth above 6%.
The country won international kudos for
producing such solid
results in a shaky global
economic climate, countering slowing exports to
Western destinations with a rise in consumer
spending, infrastructure spending and foreign
The local currency, the
rupiah, has advanced 1% against the US dollar
after gaining 4.4% in 2010. Inflation fell to a
controllable 3.8%. Credit agencies Moody's
Investors Service and Fitch Ratings both recently
raised Indonesia's debt to investment grade, which
makes government borrowing cheaper.
Trade gap This year, however,
poses greater challenges as the slump in Europe
seems more likely to spread than subside.
First-quarter figures show Indonesia's growth
continued at 6.3%.
At first glance, that's
a good start toward the government's forecast of
6.5%, but it was the slowest growth figure
registered since 2010, and so far the
second-quarter has brought more troubling news.
Inflation has climbed toward 4.5%. Exports in
April fell 3.5% to US$15.6 billion, leading to a
trade deficit of $641 million, Indonesia's first
month in the red since June 2010.
trade deficit is particularly ominous because
foreign reserve outflows could add to pressure on
the value of the rupiah, which on May 31 fell to
its lowest since November 2009. The Indonesian
currency is down more than 3% in 2012 and off 10%
from its high in August last year.
drop in the rupiah lifts inflation by up to 0.1%,
according to economists. A falling rupiah also
makes holding Indonesian equities and bonds less
attractive to foreign investors. The Jakarta Stock
Exchange's benchmark index is down nearly 10%
during the past month.
Yudhoyono's administration is trying to fight
back. Last Friday, Finance Minister Agus
Martowardojo said the government plans an economic
stimulus package to boost domestic consumption.
Consumer spending accounted for 55% of Indonesia's
GDP last year, while exports made up 32%.
To keep wallets open, Martowardojo said
the government will raise the threshold on taxable
income by almost two-thirds, to 24 million rupiahs
(US$2,553). That's a first step to encourage more
household spending; or it would be, if another
government agency wasn't working simultaneously to
counter its impact.
At nearly the same
time as Martowardojo announced the stimulus plan,
the country's central bank said it will go ahead
with its plans to restrict credit and thus reduce
consumption. Bank Indonesia's new credit rules.
which take effect next week, require a minimum 30%
down payment for property mortgages and private
cars, 25% for motorcycles, and 20% for commercial
Those down payment rates are
approximately double prevailing norms. Industry
officials suggest that under the new rules, sales
of cars and motorcycles will fall short of
forecasts by more than 10%, tumbling below 2011
Similarly, Martowardojo said the
stimulus program would also include incentives for
investment through accelerated infrastructure
financing. The government, however, has not
established the required regulations to actually
spend more on infrastructure faster.
difficult to determine whether Yudhoyono and his
administration are the villains or the victims in
this round of policy incoherence. But it has
arguably become the unfortunate norm during his
mandate On many fronts, Yudhoyono has
squandered the overwhelming electoral mandate for
reform he won three years ago. Rather than acting
boldly to press for the changes his supporters
sought, Yudhoyono has gone out of his way to
compromise, in effect asking the opposition to run
the government, and to duck the big issues.
Some argue that Indonesia has just run
into an overdue sour patch after a couple of years
of nothing but sweet spots. But the current
troubles highlight how hollow Indonesia's economic
boom has been, and how little its leaders have
done to build on it.
In exports, for
instance, shipments have focused on the
low-hanging fruit of natural resources, leveraging
into a global commodity price upswing. In value
terms, nearly all of Indonesia's exports are
non-renewable resources, including coal, petroleum
products and precious metals.
however, tend to take Indonesia's commodities and
run to process them elsewhere. Even the rock from
the Freeport-McMoRan's giant Grasberg mine in West
Papua is sent to Singapore for processing.
Despite its labor-cost advantages over
China and Vietnam, a large relatively open
domestic market, and duty-free access to the rest
of Southeast Asia and China through Association of
Southeast Asian Nations (ASEAN) trade pacts,
Indonesia has been unable to attract significant
that have tried Indonesia as an alternative to
China often complain that its logistics are
inferior due to poor infrastructure. China's
government has poured comparative billions into
roads, ports and other big-ticket projects.
Only now, with its newly won investment
grade credit rating, can Indonesia borrow the
funds to undertake similar infrastructure
improvements. At the same time, the country still
has a difficult time attracting non-portfolio
That is mainly because the
government hasn't tackled the big issues facing
the country, most notably corruption and a
dysfunctional judicial system. Nobody wants to
invest in a factory or bridge built on legal
Foreigners are rightfully leery
of a system where tycoons play by a different set
of rules, and Indonesians who are successful are
more interested in getting their money out of the
country - into a Singapore condo, for example -
than investing at home.
To its credit,
Yudhoyono and his team have tried to fight
corruption. They've supported the surprisingly
effective Corruption Eradication Commission (KPK
by its Indonesian acronym).
convictions and jail terms always seem to stop
with the little guys, tax officials like Gayus
Tambunan, rather than following the chain to the
big businesses that Tambunan alleges paid him off
to fix their taxes. You can see the glass as
half-empty or half-full, but at least there is a
What you won't see is Yudhoyono
getting out in front on any issue. He has
consistently let hot-button issues percolate and
generally adopts a consensus position with the
backing of allies. He often lets others do the
talking for him.
That leads many observers
to believe that Yudhoyono doesn't really know what
he wants, doesn't really care, or doesn't really
mean what he says, and thus his pronouncements are
No way to treat a
lady The recent cancelation of a concert by
American singer and songrwriter Lady Gaga would be
a comic footnote if it didn't perfectly illustrate
how Yudhoyono's weak leadership hurts Indonesia,
domestically and internationally.
month, a sell-out crowd of 52,000 paid from US$50
to more than $200 to see Lady Gaga perform at
Jakarta's Bung Karno Stadium. But hardline Muslim
groups, including the Islamic Defenders Front
(FPI) that specializes in mob violence, threatened
to attack the airport when the pop diva arrived
and to disrupt the show.
notoriously reluctant to stand up to Islamist and
other religious extremists without explicit
instructions from politicians, balked at issuing
permits for the concert. When no one in government
or the mainstream religious establishment dared to
stand up against the hardliners, promoters
canceled the show.
"FPI is grateful that
she has decided not to come. Indonesians will be
protected from sin brought about by this Mother
Monster, the destroyer of morals," FPI Jakarta
chairman Habib Salim Alatas told a wire service.
"Lady Gaga fans, stop complaining. Repent and stop
worshipping the devil. Do you want your lives
taken away by God as infidels?"
Yudhoyono remained hunkered in his bunker, for
good measure his government's Religious Affairs
Minister Suryadharma Ali sided with FPI, saying,
"I strongly believe this cancellation will benefit
The opposite is more likely
true. Foreign companies looking to invest in
Indonesia will see that Yudhoyono's government
lacks the fortitude to stand up to fringe groups
with the same level of support and credibility as
Florida's Koran burning pastor Terry Jones.
Instead, Indonesian authorities will let
extremists threaten violence against innocent
people without consequence and scuttle a
multi-million dollar international enterprise.
Lady Gaga had the last word when she said,
"There's nothing holy about hatred." And, she
probably knows, it's bad for business, too. As the
economic squeeze tightens, perhaps Yudhoyono will
realize he has to act decisively and get his
government in line to promote economic growth. As
the clock ticks down on his final two years in
office, he may realize a healthy economy is the
lone positive legacy he can hope to leave.
Longtime editor of award-winning
investor rights advocate eRaider.com, Gary
LaMoshihas written for Slate and Salon.com,
and works an adviser to Writing Camp (www.writingcamp.net).
He first visited Indonesia in 1994 and has been
watching ever since.
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