Anton Alifandi, principal analyst, IHS Global Insight
Key findings:
- The cabinet reshuffle in August and the demotion of a senior police officer indicate that President Joko Widodo has strengthened his political authority, increasing government effectiveness.
- One year into his term, Joko has won the support of the majority of the members of parliament and reached an accommodation with the main opposition leaders, increasing the likelihood that his proposed legislation will be passed.
- Five economic stimulus packages announced in September and October indicate that the business environment is likely to improve in the coming year.
- The overall economic impact of the stimulus packages will depend on the speed and quality of their implementation.
- In light of domestic economic slowdown and continued lingering external risk factors, Indonesia is unlikely to impose severe tightening in foreign bank regulation, as initially proposed.
Excerpts:
- A further indication of Joko’s strengthening support was the passing of the 2016 national budget on 30 October. The budget was approved by all parties with minor changes after objections from Prabowo’s Gerindra party. However, the manner in which Joko appeared to have exchanged favours in return for political support indicates a continuation of the transactional politics that he had pledged to eschew. Instead, it shows him as a pragmatic politician who is willing to compromise with politically connected business people whose influence many Joko supporters had hoped to see reduced during his presidency.
- Joko has had more problems dealing with powerful rivals in his governing coalition than with the opposition. A cabinet reshuffle in August indicates that Joko has strengthened his position vis-à-vis Megawati and Vice-President Jusuf Kalla, a former leader of Golkar who remains influential in the party.
- Joko came to power with a pledge to increase Indonesia’s economic growth to 7% during his term of office. This is a level that IHS believes will not be achieved in the next four years without dramatic reforms and a significant improvement in external demand conditions. IHS expects Indonesia’s economy to only grow 4.7% for 2015, the slowest expansion since 2009, with growth expected to slow further to 4.4% for 2016.
- The currency has made a modest recovery following the inaction by the US Federal Reserve Bank in September, but remains at risk from shifting investor sentiment. Weakness in the rupiah can boost imported inflation, but it could also place stress on the segments of the Indonesian corporate sector that have borrowed in foreign currency terms, which would further weigh on fixed investment activity.
- The economic slowdown and falling rupiah has added greater urgency to policy making, and while infrastructure improvements will be necessary to bolster the economy, other reforms have long since been necessary. Between September and October, the government has announced five wide-ranging economic stimulus packages focused on boosting the economy, largely by reducing regulatory burdens and costs to doing business in Indonesia.
- Despite fiscal slippage, the government is unlikely to raise taxation to avoid exacerbating business conditions. The government’s policy of stimulating domestic demand and reducing business costs to revive growth means that it is unlikely to raise taxes despite a projected shortfall in tax revenue.
- Banking sector fundamentals remain strong, with high capital adequacy ratios (20.3%), a low level of non-performing loans (2.3%), and a relatively strong liquidity position.
Outlook:
- The overall boost to the economy will depend on the speed and quality of implementation. IHS believes that the majority of the measures will help stabilise the Indonesian economy, but will not drive a rebound in growth up to the government’s desired 7% range in the next one to two years. IHS believes that greater economic benefits of the policy changes will be reaped over the medium to longer run as the policies are fully implemented and refined.
- The economic slowdown probably means that the government will not issue technical regulations for the pending Trade Law, therefore delaying its implementation, nor will parliament pass new laws that would further restrict foreign investment.