Indonesian president turns to populist policies ahead of tough 2019 election

Jakarta

SOON after taking office in 2014, Indonesian President Joko Widodo made a landmark decision to cut subsidies on politically sensitive fuel prices to boost the economy, but a year out from a tough re-election campaign, his reformist zeal may be waning.

Markets cheered Mr Joko's gamble to free up billions of dollars to build much-needed infrastructure, while the former furniture salesman also unveiled a series of reforms to slash regulations holding back South-east Asia's biggest economy.

Now, less than a year from an expected hard-fought 2019 election, Mr Joko has made a "strategic policy shift", say senior government officials, dropping nearly US$20 billion of infrastructure projects to focus on social welfare.

The government has also slapped price controls on staple goods such as fuel, power, rice and sugar - moves that will surely be welcomed by voters.

"Of course he's thinking about elections. With these moves, he can gain popularity by benefiting the people and ensuring welfare both in the short- and long-term," said one senior official, who declined to be named because he was not authorised to speak on the issue.

Economists warn Mr Joko's return to populist policies may threaten Indonesia's investment climate.

"With national elections around the corner, he appears to be backtracking on his reform agenda with a string of populist measures ... moves that would pressure firms' profit margins and weigh on the investment climate," Fitch Group's think-tank BMI Research said in a note last week.

Mr Joko took office promising to boost annual economic growth to 7 per cent and with an ambitious plan to build US$350 billion worth of infrastructure across the poorly connected archipelago.

Indonesia has since earned coveted upgrades from ratings agencies. Standard & Poor's last year announced a landmark upgrade for Indonesia to investment-grade status. This month, Moody's Investors Services raised its ratings another notch, citing effective policies to support broad economic stability.

Indonesia has also jumped 19 places to 72nd in the World Bank's 2018 Ease of Doing Business index.

The 56-year old still enjoys high public approval, with recent surveys giving him a double-digit lead over his main rival, former general Prabowo Subianto. He only narrowly defeated Mr Subianto in a bitterly fought 2014 election.

Mr Subianto is expected to campaign on welfare issues, the cost of living and a perceived over-reliance on Chinese investment at a time when economic growth is stagnating at around 5 per cent and consumption has been persistently sluggish.

Asked about the government's change in policy focus, Mr Joko's chief-of-staff said it was time to be "realistic".

"Development should not just be in the physical sector but also be oriented to the non-physical sector like vocational schools, education, religious schools, health," Moeldoko, a former military commander, said in an interview with Reuters.

"The president is aware that we are achieving some success in the investment area, in infrastructure, in ease of doing business, and in deregulation ... so we can leap to the next stage which is to focus on human development," he added.

Data shows that as at the end of 2017, around US$100 billion worth of roads, ports, bridges and dams had been built or were under construction.

But experts say it's unlikely the remainder of the programme can be finished before the end of Mr Joko's term in October 2019.

Denni Purbasari, the president's deputy chief-of-staff for economic affairs, said the government had taken into account external factors such as rising global oil prices in its decision to re-route funds to public welfare.

"It's important to balance between economic progress and the burden borne by the people. We 100 per cent believe that an adjustment must be made to fuel subsidies," said Ms Purbasari.

Motorcycle taxi driver Ibrahim Naben, 34, believes Mr Joko's new policies can only boost the president's support base.

"He has been fair and has a record of policies that help the poor even in the most remote islands," Mr Naben said. "We're not feeling the effects yet, but we anticipate any price controls will be good for welfare."

Mr Joko plans to keep electricity tariffs and fuel prices unchanged over the next two years by hiking subsidies by US$588 million in 2018 and making state-owned enterprises (SOEs) foot the rest of the bill.

Critics say the move is a reversal of the 2015 decision to scrap fuel subsidies and that the government is essentially forcing SOEs to subsidise prices.

Moody's has said it could undo its recent upgrade of Indonesia's government debt if the financial health of SOEs worsened and threatened the government's balance sheet.

The finance ministry has said it will monitor such risks.

Another plan to force fuel retailers to get government approval before changing prices has been criticised as distorting the market.

Other efforts to boost purchasing power include imposing a ceiling price on rice, even though traders say the upcoming main harvest of the staple should contain prices.

Arianto Patunru, a researcher on Indonesia's economy at Australian National University, said Mr Joko's actions should be seen in the context of a global shift towards populist policies.

"If the Indonesian government is carried away with this trend, I think the prospect is not so bright," he said, adding it was too early to say if it was a long-term risk to economic reforms in the country. REUTERS