Reviewing President Widodo’s Ambitious Growth Target in 2019

President Joko Widodo. Courtesy of the Presidential Office.

JAKARTA (TheInsiderStories) – The administration of President Joko Widodo has set an ambitious target of seeing domestic economy expanding by 5.4-5.8 per cent in 2019, the year that will be the end of its term and is also the presidential election year.

While the optimistic projection may be not groundless, the current administration has some great homeworks it needs to deal with to ensure the popularity of incumbent Widodo remain high during the presidential election and that some key programs will not backfire to its popularity and the growth story narrative.

Widodo will run for the race next year to win his second term, in which he will compete with former rival a retired army general Prabowo Subianto, who has accepted the endorsement of the main opposition party to run as a presidential candidate.

So far, there is no other stronger contender on paper. Still, for this too, Widodo has to confince the public his programs have done goods to the nation.

The Minister of National Development Planning Bambang Brodjonegoro said last week that the 5.4-5.8 percent growth projection is backed by the government’s optimism that a political year is unlikely to slow down investment, while household spending is expected to accelerate, amid possible favourable domestic tailwinds and potentially positive external factors.

The 5.4-5.8 percent growth projection for next year is higher than the 5.4 percent growth estimate set in 2018 state-budget.

For many analysts, such projection may sound ambitious as the bottom-end of projection is higher than the figure projected by some international financial institutions like the World Bank and the Asian Development Bank — which both are projecting for a 5.3 percent growth next year —.

Government’s Efforts to Boost Growth

It is not without some backups that Widodo’s administration is that upbeat. First, it expects to see a pick up in investment because public spending on infrastructure is likely to peak in 2018 and continue next year.

The government has been pushing for development of energy and transportation-related projects with state-controlled or state-owned firms as the executors. This has come with some costs that may hurt SOEs’ long term financial conditions.

Furthermore, the 2018 Asian Games that will be held in the capital city of Jakarta and Palembang in Sumatra island in August is  seen as the perfect momentum to whip developers, or operators of some projects that are seen to serve as the light house for the country in the eye of the international community.

Should everything goes smoothly, some of the ambitious projects may see completion in 2018 or 2019.

There are also some innovations to push investment beyond state-budget financing. The Insider Stories noted that the government is pushing for 34 projects with a total value of Rp344.64 trillion, or US$25.8 billion in the pipeline under non-budget investment financing scheme known as PINA, to lure domestic and foreign investors.

The Ministry of National Development Planning/Bappenas has also initiated the formation of the PPP Joint Office as a one-stop-service and platform for coordination for stakeholders of some PPP projects stakeholders with the central government. This office will be backed by comprising seven ministries or government agencies.

With all of these efforts, the pace of investment realization in Indonesia is expected to continue to rise, driven by positive business sentiments that stem from structural reforms, along with the acceleration of a number of national strategic projects.

From social aspect, the government has stepped up speed up reducing the country’s Gini ratio to 0.370 by 2019 from the current ratio of 0.393. The ratio measures wealth inequality, in which zero represents complete equality and one represents complete inequality. The lower the figure, the lower economic wealth gap is in the population.

It has been an increased efforts by Widodo’s administration to tackle inequality in the country of 260 million population, as the topic is often used as an ammunition to shoot his administration’s weakness by political opponents, especially in the last divisive gubernatorial election in Jakarta.

The government is also targeting to bring down the country’s poverty rate to around 8.5 percent from 10.12 percent in 2017.

As part of its spending to the poor, the government continued the previous administration’s programs and gave some modifications like for the direct cash assistance and rice subsidy to compensate subsidy cuts.

As time approaching, the year 2019, will become Widodo’s final year to prove his ambitious plans of economic development and growth, which he has pledged during campaign time in 2014, the country is able to hit a 7 per cent figure.

Setting Up Policies Becoming More Difficult

However, not all stories are sweet. Despite the country’s economic growth was relatively high compared to growth in the regions, the rate actually has been stagnating at around 5.0 percent over the past couple of years. .

Many economists Indonesia is likely to be stuck in a 5 per cent trajectory on the back of the country’s inability to get out of the hangover from the 2014/2015 commodity crash, the slow growth of its labor-absorbing manufacturing industry, and the limited time to see the push in infrastructure development results in the trickle down effects to the economy.

Despite on paper Indonesia offers one of the strongest economic fundamentals in the region and the public debt is below 30 percent of gross domestic product (GDP), one of the lowest among emerging market economies, Widodo’s infrastructure push has been attacked by opponents as unnecessary when the price of rice, or chili soars in the market.

Inflation has acctually been moderate at around 4% in recent years, but recently it has been easy to blame the government that prices has been spiraling up, especially when the government was too lose in letting non-subsidized gasoline set by distributors.

The problem was quickly addressed with the government taking control in setting the price of non-subsidized gasoline, a strange move that may put a serious questions over whether public or privately owned distributors can make enough margins to distribute the non-subsidized gasoline.

Meanwhile, policy-making becoming more challenging this and next year, with some nationalist sentiment overshadow many of the government’s positions.

Some major projects, including in Grasberg mine, Papua, the government appears to be in flip flop and decisions appear to carry some nationalist sentiment. It is not a matter of whether the government should bow to foreign multinational companies, or being tougher on nationalist sentiment. However, it is the slow decision that has led to ineffective operations which is the world’s largest gold mine and second biggest copper mine, which in turn affect economic performance and welfare of the people in Indonesia’s eastern most island.

Freeport’s case  is the benchmark in the industry over the government’s consistency to implement regulations from the previous administration. The government’s flip flop to implement domestic processing requirement for some minerals has upset some investors in the smelter industry and lead to postponement of some major projects.

Meanwhile, in short term, there is a possible capital outflow threat, amid high yields of the US treasury bonds, that may derail inflation target, force the central bank to raise its benchmark interest rate. A higher interest rate means a slower consumer spending and a break for corporations to borrow money for projects.

Widodo recently made a comment that was surprisingly quoted by an international news agency, that the government will not intervene on the weak rupiah (which by law they cannot!), showing how easily the current administration is panicking to deal with external tailwinds.

Near the election, it is the time for Widodo to maintain his consistence and shows the public that his administration’s policy is not easily distracted by short term shocks or development. Many investors have interests in investing long term horizon in Indonesia and as one of the silver lining of the growth story for 2019 is expectations that investment to pick up, then it is about time to give investors some confidence that at least the government is not beign flip flop on its policy.