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Indonesia's pragmatic policies giving it resilience amid market turbulence
A RELATIVELY small shock spawned by the devaluation of Thai baht in 1997 triggered a traumatic financial and economic collapse in Indonesia. Twenty years of sustained reforms then transformed Indonesia into a more resilient economy, one that can better weather the ongoing turbulence in emerging markets. The key is a practical-minded leadership that understands the need for credible policy responses that leverage off the country's improved economic fundamentals.
CLEAR-MINDED POLICY RESPONSES TO CONTINUE
Indonesia's leadership is under no illusions about the likely difficulties in global financial markets: things could well get worse as the US Federal Reserve Bank continues to raise rates and reverse its quantitative-easing policies. Global investors may well be rattled by further trade frictions as well as the darkening prospects for some other large emerging economies. China's financial and economic imbalances could well lead to the occasional unpleasant surprise that might shake already-jittery financial markets. Indonesia understands that this is no time for policy complacency.
That is why the Indonesian government has crafted a comprehensive strategy to ensure that the economy withstands any possible further stresses.
Firstly, President Joko Widodo is a president who is far from any potential conflict of interest, free from corruption or scandals. His children and his wife are not involved in any business related to any government project. This increases the credibility of the government in dealing with various problems.
Secondly, solid coordination between the government and the central bank. President Joko Widodo has given his strong backing to central bank governor Perry Warjiyo, who has proactively raised policy rates by a total 125 basis points in the past few months, giving a positive surprise to the financial markets. Bank Indonesia has signalled that it is ready to do more if necessary to stabilise the economy and is also preparing macro-prudential measures to reinforce its interest-rate policy.
Thirdly, the economic agencies are coordinating measures to curtail import growth. Fiscal policy is being used to cool demand for imports while incentives have been rolled out to boost the local content in products made domestically. Businesses are increasing the use of domestically produced palm diesel as fuel, which will help reduce demand for crude oil imports. Indonesia's palm oil output is the world's largest.
Fourthly, there is a big push to boost tourism revenues. Policies such as the extension of visa-free arrangements for more countries have boosted foreign tourist arrivals by 12.5 per cent in the first seven months of this year, compared to the same period a year earlier. The government has developed new tourist destinations and has also embarked on an infrastructure push to build new airports. Consequently, international airlines such as the Middle Eastern airlines are increasing their flights to Indonesian destinations.
Fifthly, efforts are underway to improve inflows of foreign direct investment and to strengthen export-oriented industries, which would help improve the external accounts over time. Both of these have been constrained by poor infrastructure as well as by an unfriendly business environment.
President Joko's administration has succeeded in raising infrastructure spending by a full percentage point of the gross domestic product in the past 11/2 years, resulting in better access to electricity and improved roads and ports. But the most impressive success has been in the business environment.
ECONOMIC FUNDAMENTALS BETTER THAN MOST EMERGING ECONOMIES
Indonesia has made solid gains in its ranking in the World Bank's ease-of-doing-business survey - it is now ranked 72nd, up from 114th in 2015. Similarly, the latest Logistics Performance Index put Indonesia as the third-best performer among the lower-middle income group. Worldwide, Indonesia is now ranked 46th, a substantial improvement from its 63rd position in 2016.
Indonesia's economy has been growing at around 5 per cent a year in the first half of this year. Higher interest rates will cool demand somewhat in the second half, but rising infrastructure investment, exuberant consumer confidence, higher prices for its key commodities and growing tourism spending - especially being helped by the Annual Meeting of World Bank and IMF 2018 in Bali - will help sustain economic growth at reasonably good levels.
Bank Indonesia's sustained commitment to inflation targeting has also resulted in inflation rates falling to their lowest pace in decades. Core inflation has remained below 3 per cent so far this year. More importantly, the country's inflation is no longer much higher than its trading partners' average inflation - which means at least that there is less need for its rupiah to depreciate to maintain cost competitiveness.
Indonesia's consistent pursuit of prudent fiscal policy has left it with an extraordinarily low government debt of just 28.7 per cent d of gross domestic product, a ratio that developed countries would give an arm and leg for. Budget deficits have been kept below 3 per cent of national output as well. A successful tax amnesty has widened the tax base and resulted in a 16.5 per cent on-year increase in tax income year-to-date through August 2018. Rating agencies have taken note. Fitch Ratings recently maintained Indonesia's long-term sovereign debt rating at "BBB", (above investment grade), with a stable outlook, confident of its economic resilience.
Indonesia's current account deficit has also been contained to around 3 per cent of gross domestic product. This deficit is primarily the result of investment spending that is boosting productive capacity for the future and has been easily financed. The weaker exchange rate, higher interest rates, fiscal measures to reduce import intensity and rising tourism revenues will help keep the current account deficit in check.
Indonesia's credible policies and favourable economic fundamentals should help it weather the storms in global financial markets. But its leaders are not taking anything for granted and have the wherewithal for strong policy responses to keep the economy on track.
It is not easy, but we are sure we will prevail.
- The writer is Indonesia's Coordinating Minister for Maritime Affairs