(April 18): After a presidential campaign dominated by nationalist rhetoric, the projected winner, incumbent Joko “Jokowi” Widodo, now has to face an uncomfortable reality: Indonesia is dangerously exposed to the rest of the globe. Adjusting to this fact needs to become a priority in his second, and final, term.
This dependence on the world beyond Indonesia's 17,000 islands manifests in several ways. A persistent current-account deficit means interest rates are higher than they otherwise would be in order to attract foreign capital and prevent a slide in the currency. Commodities exports face a big long-term challenge in the slowing of China's economy to a growth rate ultimately resembling the US’s. Even in the best of times, emerging markets are rarely masters of their own destiny.
Re-orienting an economy is always something best tackled in the first years of a president's tenure. By the middle of the second term, things are drifting. Within a year or so, legislators and other players will already be thinking about the post-Jokowi era. (After three decades of authoritarian rule by Suharto, which ended in 1998, Indonesian leaders are limited to two five-year terms.)
Still, there are some things Jokowi can do that aren't pie in the sky and would go some way to mitigating Indonesia’s weaknesses.
First on the list: The country has no meaningful export manufacturing business. That means its current-account vulnerabilities have gone unaddressed. Factories dot Indonesia, but are largely for domestic consumption, says Mohamed Faiz Nagutha of Bank of America Merrill Lynch. The Southeast Asian nation has no substantive presence in global supply chains, setting it apart from neighbors like Singapore, Malaysia, Thailand and Vietnam.
That’s largely because it’s still not easy for multinationals to operate in the country. While Indonesia steadily improved its ranking in the World Bank's Ease of Doing Business survey during Jokowi's first term, it’s still in the middle of the pack.
For one thing, hiring and firing is difficult, with a relatively long notice period required to let people go. Severance payments are about twice as big as the next highest-paying country, Thailand, according to World Bank figures cited by Capital Economics.
Supply chain operators also need certainty about ownership and procurement. Yet Jokowi has showed a predilection in his first term to put resources in the hands of the state. Factory owners in Detroit or Shanghai don't want to wake up in the morning and find themselves nationalized.
Indonesia isn’t going to suddenly become the next Singapore or Taiwan, but some rules that add confidence in these areas would be welcome. To its credit, Indonesia’s central bank has been a bastion of stability for businesses. Still, having chased the Federal Reserve up in 2017 and 2018, a rate cut or two would also be in order this year.
In the last election, Jokowi was a fresh-faced candidate free of ties to the military or ruling Javanese caste. Now he’s the incumbent and, soon, he’ll be a lame duck. He needs to quickly rediscover the qualities that first got him elected, and challenge the vested business and bureaucratic interests that have slowed change, if he wants to pull off some lasting reforms. It’s time for the onetime outsider to take some risks.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.