Shotaro Tani, Jakarta – As Indonesia heads toward its presidential election on April 17, incumbent Joko Widodo, popularly known as Jokowi, will be partially judged on his economic track record since taking office in 2014.
Many observers credit Widodo for his sound handling of Southeast Asia's largest economy, but he has fallen short in some areas, notably his reform agenda, where he has taken some backward steps.
Here, we assess how far Widodo has progressed in nearly five years of tackling his key economic pledges.
Growth
The archipelago has enjoyed a stable economic expansion during Widodo's near-five years in office, with real gross domestic product growing around 5% – faster than regional peers Thailand and Malaysia.
But the expansion is under the 7% he pledged in his first presidential campaign. One view is that the current rate is merely a result of the "demographic dividend" from the country's young and growing population.
Consultancy PwC expects the economy to become the world's fourth largest in terms of purchasing power parity by 2050, overtaking the likes of Japan and the U.K. Completion of infrastructure projects – Widodo's signature policy – will help, but reforms are needed to reach that potential.
"With headwinds mounting, in the form of slower global growth, low commodity prices, as well as tight monetary and fiscal policy, economic activity in Indonesia is likely to slow," said Gareth Leather, senior Asia economist at Capital Economics. "Although official figures are almost certain to show GDP growth average around 5% over the next couple of years, we expect activity in reality to slow to around 4.5%."
Prices and currency
Inflation soared past 8% just two months after Widodo took office, as he cut energy subsidies to free up funds for infrastructure spending. But price increases soon stabilized as global oil prices plummeted.
Keeping a lid on inflation is a priority for Widodo, whose support base mainly consists of people on the lower rungs of the social ladder. His administration has catered to them to a certain degree. He capped the price of rice and other staples, and in the 2019 budget revived the fuel subsidies.
A falling currency was a headache last year for Widodo, and added to inflationary pressures in a country dependent on imports such as oil. The rupiah slid to a 20-year-low against the U.S. dollar last year as the Federal Reserve pushed on with interest rate hikes.
The central bank stepped in, raising the key seven-day reverse repo rate by a total of 175 basis points to 6%. The government also used unorthodox measures to cut the trade and current account deficits – a source of constant rupiah outflows. It expanded the use of palm oil-based diesel and increasing taxes on importers of more than 1,000 consumer goods.
A more dovish Fed has since helped to stabilize the rupiah, and some analysts, including economists at Goldman Sachs, expect additional rate cuts this year.
Infrastructure
Indonesia has long suffered from a chronic lack of connectivity between its 17,000 islands, and logistics costs amount to as much as 25% of GDP – the highest ratio in Southeast Asia as of 2016, according to the Asian Development Bank. This has prompted Widodo to make infrastructure a priority.
He has overseen openings of numerous air and sea ports as well as the country's first mass rapid transit system. The commuter lines, which recently opened in Jakarta, were Widodo's signature project when he was the city's governor. He also claims to have extended the length of toll roads in the country by 436 km.
But the president has also seen delays, notably the stalling of the Chinese-led high speed rail link between Jakarta and Bandung, Indonesia's third largest city, because of paperwork and permit issues. Observers are also concerned about rising debt levels at state-owned construction companies that carry out the infrastructure projects.
"Financial vulnerabilities are rising at some SOEs," said an OECD report on Indonesia last year. "Rapid investment and higher leverage exposes SOEs involved with infrastructure projects to cash-flow difficulties, particularly if interest rates increase or projects are delayed."
Public finances
The nation's finances have remained sound under Widodo, partly due to a rule that caps the annual budget deficit at 3% of GDP. The country's debt to GDP ratio, standing at 29%, is the lowest in the region. Major rating agencies also upgraded the country's sovereign debt to investment grade during the president's tenure.
But the OECD has said that raising revenue is a "key fiscal challenge" for Indonesia. With nontax revenue falling as a result of lower commodity prices, raising tax revenue is a must. But with 60% of the economy reliant on the informal sector, tax revenues remain low compared to other emerging economies.
"The biggest fiscal challenge is funding spending that will boost long-term growth and improve well-being," according to the OECD. "Tax reforms that durably raise medium-term revenues would reduce exposures to commodity cycles and could push Indonesia into a higher tax, higher growth equilibrium."
Jobs
The unemployment rate under Widodo has hovered around 5-6%, falling to its lowest level since 2014 in February this year. The president, in his campaign leaflet, claims to have created more than 10 million jobs.
The rapid expansion of the digital economy has helped Widodo bring down unemployment. In his four years, the country has seen the rise of four unicorns – private companies with valuations of over $1 billion – and they are now major employers. Go-Jek, a ride hailing operator, has managed to lift millions of previously unemployed Indonesians to employment status.
"Jokowi deserves part of the credit for this turnaround," said David Sumual, chief economist at Bank Central Asia. "His infrastructure projects have generated new jobs, and his government has largely facilitated the rise of the digital industries, which have grown into a major job creator."
Reforms
Widodo has widely been seen as a reform-minded president – and having worked as a furniture exporter before he entered politics, he is mindful of the importance of cutting red tape.
He has introduced online single submission – an online business registration system designed to cut lengthy bureaucratic procedures to obtain key permits – and a series of economic packages aimed at opening up certain sectors to foreign businesses. His efforts propelled Indonesia to 72nd place in the World Bank's Ease of Doing Business ranking in 2017, up from 120th in 2014.
But with the presidential election looming, the country has taken a backward step. Widodo decided against relaxing a negative investment list in his latest economic reform package after a backlash from opposition and business organizations.
He "has continued to shy away from the tough reforms that are needed to boost the country's long-run prospects," said Leather of Capital Economics. "The president has made no progress on freeing-up Indonesia's rigid labor market. So long as it remains extremely difficult to hire and fire workers, it will be very hard for Indonesia to develop the sort of labor-intensive manufacturing base that has underpinned the economic success of other countries in the region."