But the Jokowi team appears to be changing heart toward fiscal conservatism. In August, the government said its 2020 fiscal deficit would come in at 1.75% of GDP, smaller than its earlier outlook of 1.93%. The budget for infrastructure, which accounts for roughly 20% of total government spending, flattened out. Sri Mulyani Indrawati’s reappointment as finance minister leaves the impression that the latest budget is here to stay.
Granted that Jokowi may be chastened after soaring public debt became a presidential campaign issue, is this fiscal tightening a good idea? The economy is grinding along at the slowest pace since 2015. The dream of again attaining 7% growth in gross domestic product last experienced during the China commodity boom fades a bit more each year.
The heavy lifting of the president’s economic ambitions will inevitably fall on the shoulders of its central bank, which has already cut its benchmark rate three times this year. Betting that more cuts are on the way, foreigners have revived their appetite and gobbled up around $10 billion in sovereign debt this year.
Unfortunately, monetary easing never works that well in Indonesia. This year, commercial banks’ lending rates to consumers and businesses remained at double-digit levels, even as Bank Indonesia slashed its benchmark rate by 75 basis points to 5.25%.
Banks may not bother to make adjustments, knowing that in the past when Bank Indonesia has entered an easing cycle, it was quickly reversed. Still, with 39% of sovereign debt owned by foreigners, the world’s fourth-most-populous country is keenly sensitive to global investors’ mood swings and the need to defend the rupiah with high interest rates. The memory of the ultimate hot money pullout, the 1997-98 financial crisis that triggered the collapse of the Suharto regime, is never far from the surface.
The Jokowi administration could argue that spending on infrastructure is still robust. Technically, that’s right. State-owned enterprises — not the budget — have absorbed most of the construction costs of the past five years. Even for the planned new capital on the island of Borneo (estimated tab: $33 billion), federal money will pay for only 19%. More than half will be shouldered by SOEs and 26% by the private sector. Will private businesses want to invest in Indonesian roads and airports if the government is reluctant?
The government has already embraced the Chinese way, saddling SOEs with billions of dollars of debt. There seems additional scope for more, however. Bank loans to non-financial SOEs account for only 8% of the system’s total, peanuts compared to China. The fact is, Indonesia still desperately needs hard infrastructure to reduce inequality among its nearly 270 million people. In the last two decades, China never stopped spending on faster railways and bigger airports.
Jokowi should stay on track. The current fiscal deficit is well below the legal limit of 3% of GDP per year. It’s good that he’s seeking to overhaul Indonesia’s onerous labor laws and revise its negative investment list in order to attract foreign direct investments, which is more stabilizing than portfolio flows in and out of bonds and stocks. FDI in the manufacturing sector hit records during Jokowi’s first term, but will stay limited if the roads and ports remain clogged.
A timid fiscal stance in a world where modern monetary theory is all the rage will only discourage direct investment. What’s left is foreign hot money, parsing Bank Indonesia’s every word and guessing how many incremental rate cuts the bank will make. That money will leave as fast as it arrives.
To contact the author of this story: Shuli Ren at firstname.lastname@example.org
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Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron’s, following a career as an investment banker, and is a CFA charterholder.