Bad news can be good for Indonesia. A slowdown in economic growth and the prospective hit from US tariffs might be imposing some discipline on Indonesian President Prabowo Subianto’s government. It is a welcome change.
The former general is only seven months into his term and some of the toughest decisions probably still lie ahead. Nonetheless, the sense of chaos that characterized the very start of the administration has abated.
Markets approve the return of normalcy: The rupiah has gained this quarter after disappointing last year, and a recent bond auction was well-received. Offshore investors are warming to the nation’s stock market after seven months of outflows.
The central bank felt comfortable enough to lower interest rates last week and signal further easing to come, in a decision that was forecast by most economists. So why the big deal? Bank Indonesia had been hard to read in the closing months of last year and the start of this year, when officials oscillated between shoring up the rupiah and stoking growth.
Holding on to predictability might not sound exciting, but it is the way monetary affairs are supposed to work. The shift is refreshing. (Former Bank of England governor Mervyn King once remarked that the ideal condition is one of boredom.)
While many economies would be hurt by the tariffs imposed by US President Donald Trump, the 32 percent “reciprocal” levy handed down to the country is among the highest in the region. Duties have been reduced to 10 percent for a few months to allow for a deal. Indonesia is hopeful for an accord, but cannot count on it.
The upside is that disenchantment with US trade policy, and the ham-handed way it has been implemented, has pushed the US dollar down against most peers. This has helped boost currencies like the rupiah that were decidedly wobbly last year. It is a silver lining to a poor US approach.
The second fright is domestic in origin. Central to Prabowo’s campaign was a pledge to accelerate the pace of growth from the average of about 5 percent recorded by his predecessor, Joko Widodo, to about 8 percent.
That was always going to take some doing; no economy of any consequence is expanding at that clip. However, first-quarter figures showed an unexpected slowdown. The main culprit was a sharp drop in state spending and investment. Household consumption was also lackluster. This was not the way it was supposed to work. Prabowo had talked about using the government purse to lift the country’s performance, not diminish it.
The president has been a victim of his own rhetoric and populist impulses. The new year did not begin auspiciously. A long-planned increase in a value-added tax (VAT) was gutted at the last minute. Markets reacted poorly. The perception was that the nuts and bolts of economic policy, previously left largely to technocrats, was being hijacked by Prabowo. Speculation grew that respected Indonesian Minister of Finance Sri Mulyani Indrawati would soon depart.
The tax U-turn was then followed by a drive for savings that became almost comedic. Spending by ministries, agencies and local authorities was frozen; some offices switched off lights and suspended the use of elevators to save electricity. The president attacked some civil servants as “little kings” intent on stymying his agenda. If he cared so much about fiscal probity, would it not have been better to let the broad VAT hike proceed?
The government looked like it did not know what it was doing. Instead of emphasizing stability, a hallmark of Indonesian economic policy in the decades since the Asian financial crisis, chaos looked like it would become the defining feature. That is a dangerous development for a country with a current account deficit dependent on capital pouring in to maintain the rupiah’s value. That things seemed to have settled down is a blessing. Markets in Jakarta no longer gyrate on speculation about Cabinet shake-ups. Meanwhile, Trump’s assault on governing norms makes Prabowo’s early reversals look minor.
Indonesia is not necessarily out of the woods. The president has not walked away from the general idea that a muscular fiscal policy is desirable. Spending on his signature initiative, the provision of free school lunches across the vast archipelago, would probably show up in second-quarter growth figures. In the event that Trump is able to secure a string of trade deals and the US dollar rallies, the rupiah could again buckle.
For now, though, let us cautiously celebrate that chaos has taken a sabbatical. The relative stability has not come through ideal circumstances, though that it has happened matters. We have had a glimpse of what can happen when Indonesia gets out of its own way.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor for economics at Bloomberg News. This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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