Continuing Jokowi’s momentum in 2015 in wake of bold policies

Continuing Jokowi’s momentum in 2015 in wake of bold policies Winarno Zain  ;  A graduate of the school of economics at the University of Indonesia; A commissioner at a publicly listed oil and gas service company

JAKARTA POST,  05 Januari 2015

                                                                                                                       

As Indonesia enters 2015 it still faces several questions on its economic prospects. On the international scene, the prospect of the global economy is still clouded by uncertainties surrounding the timing of the interest rate hike by the US Federal Reserve. In its last statement the Fed said it “would be patient” in hiking rates amid stronger US growth. Coupled with the possibility of the eurozone slipping into recession and the still weak economy in Japan, it means market volatility will continue in 2015. For the Indonesian economy this means the fear of volatility in capital flows and the rupiah exchange rates are still alive. In recent years the Indonesian economy has been riding on the high prices of its commodities but now the commodity boom has ended. It is hard to expect any strong recovery in commodity prices next year. Except in the US, economic growth in Indonesia’s main trading partners remains subdued. Prices of coal and crude palm oil, the two biggest Indonesian commodity exports, will remain weak as growth in China and India, the two biggest buyers of Indonesian commodities, are below their historical trends in recent years. Rubber prices may improve as rubber is mostly exported to the US where the automotive industry is picking up. Exports of minerals will remain weak in the face of the government export ban on raw minerals, and also because there is still oversupply of ores around the world. The drop in oil prices will slow down import growth, hence narrower current account deficits in 2015. This year Indonesian industries will suffer from the impact of the increase in minimum wages. The increases which were fixed by several regional governments recently were the highest in a decade and in some cases even higher than the inflation rate. As inflation went down prior to the increase in the price of subsidized fuels in November, it means workers received a significant increase in their real wages. Even with higher inflation after the fuel price increases workers still achieved higher real wages. The problem is the increase in real wages was not accompanied by increases in productivity. Labor productivity in Indonesia remains low due to low levels of education and technology used. This means Indonesian industries will suffer higher unit labor costs. This could erode the gains in exports by Indonesian manufacturing from the steep depreciation of the rupiah in recent months. And it is questionable whether the manufacturing sector will still enjoy a competitive advantage from labor costs in 2015. The growth prospect in 2015 will also be shrouded by the tight monetary conditions. Bank Indonesia (BI), the central bank, will still prioritize macroeconomic stability over growth in 2015. BI monetary instruments such as interest rates will still be used to stem inflation and current account deficits. Knowing that interest rates were not effective in stemming the fall in the value of the rupiah, BI resorted to market intervention, but after a while this was abandoned when it was realized that it would impose a huge cost on its reserves. Tighter liquidity since early 2014 has pinched the ability of banks to maintain their loan growth as bank deposits are growing slower than bank lending. Bank lending only grew 12.4 percent in October 2014 year-on-year, a steep drop from 22 percent growth in the previous year. The loan to deposit ratio (LDR) has gone up and banks cannot force their LDR to go up further without endangering their liquidity. All of this will have a negative impact on investment. ... the fuel subsidy in the government budget ceases to be a wild card... We hope that the drop in oil prices will have some positive impact on the world economy, however. In the developed economies consumers will save billions of dollars in cheaper gasoline for their cars. These savings will be transformed into consumption, driving up economic activities in those countries. And as inflation softens from lower gasoline prices, central banks everywhere are geared for looser monetary policies that could pump more liquidity into the economy. Here at home the drop in oil prices could boost the momentum for the subsidy reforms started by President Joko “Jokowi” Widodo in November when he raised subsidized fuel prices by an average of 31 percent. As oil prices have dropped and political resistance to reducing fuel subsidies is muted, the situation has become conductive for the government to revamp the fuel subsidy system — which it did — on the eve of 2015. Domestic fuel prices are now floated except for diesel and kerosene, for which some subsidies are being maintained. The finance minister has predicted that fuel subsidies in the 2015 budget could be cut significantly from Rp 276 trillion (US$22 billion) to Rp 60 trillion. This saving in fuel subsidies is so huge that the government could sharpen its budget priorities with higher spending on infrastructure building, social programs and reducing poverty. Another outcome from this new system is that the fuel subsidy in the government budget ceases to be a wild card, and could now be shielded from the vagaries of oil prices and the rupiah exchange rate thus placing the government budget on a sounder footing. Could some kind of snowball effect arise from this? Market confidence in President Jokowi has strengthened, as it is realized that the President has boldly implemented politically difficult and risky decisions. They also see that President Jokowi is impatient with bureaucratic inertia and is serious in making business easier by streamlining bureaucratic procedures and licensing systems. Analysts feel that it is a matter of time before Standard and Poor (one of the three rating agencies besides Fitch and Moody’s) upgrade its rating on Indonesia’s sovereign debt to investment grade. This could lower borrowing costs for the government and Indonesian firms. Market confidence would open the door for more capital inflows and investment, which has to be safeguarded by the government by continuing consistency in policy reforms. Otherwise it will disappoint the market and the momentum for growth will be lost. ●