JAKARTA (TheInsiderStories) – Joko Widodo has just been re-elected for the second term as Indonesia’s president, according to the election commission official announced, beating Prabowo Subianto, his challenger. It gives Widodo another five years to build on his solid performance: the economy is set to grow more than 5 percent this year, inflation is under control and the currency has stabilized after last year’s sell-off.
Most economists saw the return of Widodo to make Indonesia’s economic opportunities grow even greater because of the continuity of policy. This can support investment and growth, as well as financial market stability, and positive credit.
Moody’s, for example, in its latest report assessed that Widodo’s superiority would allow a new focus on several reforms in his first term. Including the construction of infrastructure and human resources, and gradual bureaucratic cuts.
Moody’s said in his tenure from 2014 to 2018, Widodo implemented several major reforms, including the dismantling of fuel subsidies, holding a tax amnesty policy, enacting the law of land acquisition, and removing some rules and requirements that hampered the infrastructure sector.
He also focused on implementing reforms, although gradually, and streamlining complex regulations to encourage investment. This translates investors as a step towards improving Indonesia as a place to conduct business.
Nonetheless, economic growth in the Widodo era tended to be flat at around 5 percent, far below the 7 percent he imagined while serving in 2014.
The government is forecasting growth of 5.3 percent this year and as much as 5.5 percent in 2020, with downside risks coming from slower global growth and unresolved trade tensions between the United States and China.
Unlike other export-heavy economies in Southeast Asia like Malaysia and Thailand, Indonesia is more reliant on domestic sources of growth, such as consumer spending.
Subdued inflation and a stable currency may help spur household sentiment and expenditure, which is already getting a boost from Widodo’s social welfare spending and fuel subsidies.
A key focus area will also be on narrowing the current-account deficit, cited as a key risk for the rupiah. The government imposed import curbs to reduce overseas demand, as well as promote the use of biofuels to cut down on crude imports.
Much will depend on whether Widodo chooses to retain his finance minister, Sri Mulyani Indrawati. She was successful in narrowing the budget gap to 1.76 percent of GDP last year, well below the 3 percent ceiling, and improve tax compliance.
However, Indonesia’s tax-to-GDP ratio remains low at about 12 percent. Widodo has pledged to borrow only to finance infrastructure projects, and to reduce the reliance on foreign ownership of government bonds.
The jump in oil prices this year will help boost government coffers, but if Widodo keeps fuel subsidies in place, rising crude will put additional strain on the budget.
Therefore, Indonesia can expect much of the same in terms of economic policy under Widodo. He won popularity for his handling of the economy during this first term and therefore the basic strategy is set to continue – heavy spending on infrastructure and social programs, especially education, and a continued push to reform Indonesia’s sclerotic bureaucracy and regulations.
In summary, addressing structural constraints stemming from infrastructure gaps, limited regulations, and a lack of human resources are likely to remain Widodo’s policy priority.
According to the International Monetary Fund calculations, a mix of policies that address infrastructure gaps, reduce the dominant role of state-owned enterprises, reduce trade and investment barriers, and encourage human resources will enable Indonesia to achieve the real GDP growth potential of 6.5 percent in 2022.
Continuation of policy also bodes well for financial market stability. Given that foreign investors hold about two-thirds of Indonesian government bonds, a stable policy direction, and fiscal discipline will help prevent disruptions to the currency and capital markets and support the smooth availability of financing.
It remains to be seen how ambitious Widodo will be in the desperate need to reform Indonesia’s labor laws if he is to realize his plans to transform Indonesia into a manufacturing hub – there will be serious push back from unions on this. Overall though, the future for Indonesia’s economy looks bright. The question is not if Indonesia will realize its economic potential but when and how.
Written by Lexy Nantu, Email: email@example.com