Of all the things Indonesia's Joko Widodo thought might be preoccupying him 1,085 days into his presidency, credit default swaps and currency forwards probably were not among them.
Two recent news items explain why market gyrations are at the top of his inbox. First, the World Bank listing the rupiah among currencies most at risk as global credit conditions tighten. Second, data suggesting foreign investors are declaring their own warning, dumping more than $2 billion of Indonesian stocks in the third quarter. This exodus tops the previous high in 2013 amid the Federal Reserve "taper tantrum."
Is Indonesia on the verge of another crisis? Doubtful, though it is easy to forget that Southeast Asia's biggest economy is still largely a good-news story. Ten years under Susilo Bambang Yudhoyono, president from 2004 to 2014, essentially resurrected the place from economic death. In the aftermath of the 1997-1998 Asian crisis, more observers bet on Indonesia going the way of a Soviet-style breakup than becoming an investment-grade growth darling.
A former general, Yudhoyono reduced the military's role in Jakarta, modernized institutions and surrounded himself with competent deputies to dismantle the corruption machine which dictator Suharto built over 30 years in power (he was ousted in 1998 by giant protests). In 2014, Widodo, who is known as Jokowi, was elected to take Yudhoyono's reforms to the next level. The Fed scare of the previous year, when the rupiah plunged, reminded investors that much heavy lifting remained.
It took Jokowi a while to find his reformist mojo, but he is implementing a $350 billion infrastructure program, increasing public accountability and transparency, putting more tax collection and procurement processes online and leading an amnesty tax push to increase investments at home. The proof: a big gain in the World Economic Forum's latest global competitiveness index -- to 36th from 41st a year ago. He also has maintained Jakarta's improvement in Transparency International's corruption rankings -- to 90th from 133rd in 2004.
Markets seem more doubtful. Topping the list of letdowns, says Callum Henderson of Eurasia Group, is disappointment over the 5% growth rate, the slow execution of infrastructure projects and the tax amnesty scheme not yet translating into a property boom. Others worry about militant groups and Islamic-based opposition parties: The latter are using their clout with Indonesia's 263 million people to stymie Jokowi's agenda. Running an archipelago of nearly 18,000 islands that is home to the world's largest Muslim population is no simple matter.
Capital outflows are a wake-up call. McKinsey's prediction that Indonesia will be a Group of Seven power by 2030 hinges on how assertively Jokowi retools the economy in the last two years of his term. He can break through the complacency by getting back to basics.
Jokowi is the first Indonesian leader independent of the military or dynastic families, bestowing an outsider halo. Before his two years as Jakarta's governor (2012-2014), Jokowi was a community organizer who took a hands-on role addressing the most menial of problems and proved himself beyond reproach -- known interchangeably as "Mr. Fix It" and "Mr. Clean." It is time he got back in touch with those attributes.
It might help to properly diagnose the problem. Jokowi's motivating principle is engineering a more equitable distribution of wealth. An important goal, given that 52% of Indonesians survive on $2 or less per day. But it is equally important for Indonesia to create more wealth that can be shared. That means more foreign direct investment to finance better roads, bridges, ports, power grids and improved education to strengthen the labor pool.
Worst cash exodus since 2012
But investment flows are disappointing all around. Even though Indonesia is among the most resource-rich nations, mining sector FDI was negative in the second quarter. In fact, it was the worst exodus of cash since 2012, with companies divesting $625 million. Regulatory uncertainty is one problem. So are the forces of economic nationalism, dramatized by the tussle between the government and Freeport-McMoRan Inc. over the ownership of the world's largest gold mine and second-largest copper mine, the Grasberg deposit in Papua province.
Jokowi must act immediately to put more reform wins on the scoreboard. In other words, take his mandate out for a ride. With roughly 70% of parliamentary seats and supportive coalition partners, Jokowi has the latitude to push for simplified investment rules, curb Jakarta's notorious bureaucracy and drag inefficient state enterprises into the 21st century. Reducing the nation's power bottlenecks alone might score big points in boardrooms from Toyota Motor to Samsung Electronics. So would addressing land and labor laws and streamlining the tax code.
The president must be bolder about diversifying the economy away from natural resources. That, coupled with investments in training and productivity-enhancing industries, would go a long way toward to ridding Jakarta of all vestiges of Suharto Inc. It would hasten improvements on the World Economic Forum and Transparency International tables, pay hundreds of billions of dollars' worth of dividends and ensure Jakarta keeps pace with restructuring efforts in China, the Philippines and Vietnam.
With growth slowing, Jokowi may be tempted to lean on the central bank to ease more and gin up fiscal stimulus. The future would be brighter if he went the other way. By putting on his "Mr. Fix It" hat and accelerating reforms, Jokowi can reassure jittery foreigners that Indonesia is still a good-news story.
William Pesek is a Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He has written for Bloomberg and Barron's.