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Economy

Indonesian president struggles to find a way forward

JAKARTA -- The thick, choking haze caused by land-clearing fires on Sumatra, western Indonesia, has developed into the worst air pollution in recent years. Severely polluted air and blinding smoke now blanket the entire region, including Singapore, Malaysia and southern Thailand. Neighboring countries have criticized the Indonesian government for its failure to prevent the burning, and this has led to international tensions.

     Not only the air is hazy in Southeast Asia's biggest economy. President Joko Widodo himself seems to be in a cloud as he enters his second year as president on Oct. 20.

     He became president last year amid high hopes, both from voters and the international business community. They were excited by the promised structural reforms and economic recovery, which the country desperately needs as it tries to catch up with its regional peers. But one year later, economic growth has further slowed to below 5%, the rupiah has depreciated to its lowest level since the 1997-98 Asian financial crisis, inflation is persisting at over 6%, and stock prices have declined about 20% from their recent peak.

     Widodo's promised reforms have been put in place only partially. His cabinet members have put forward a series of protectionist measures, despite the president's promise to create an investor-friendly economy. Widodo himself has taken hard-line nationalistic stances on some diplomatic issues.

     Thus, both the international business and diplomatic communities are stumbling about in the haze, with suspicions growing about Widodo's determination and political capability to pursue reforms and take on responsible roles on the international stage. As one top executive at a Japanese automaker said, "I cannot help but doubt that the administration is serious about attracting investment."

 

Slower than planned

The top priority was given to scrapping $18 billion worth of fuel subsidies and instead spending the money on infrastructure, as Widodo spelled out in his initial reform agenda. He already managed to abolish the gasoline subsidy and minimize the diesel subsidy by the start of 2015, and made the funds available for more public works.

Beer is sold in supermarkets due to a ban on its sale at small retailers, including convenience stores. (Photo by Keiichiro Asahara)

     But actual infrastructure spending has been well below targets for the first half of this year, thanks to a host of barriers, including complicated land acquisition processes and slow administrative procedures.

     For example, at the end of August, Widodo announced the start of construction of a $4 billion coal-fired power plant in Central Java that had been delayed for years due to land acquisition issues. In reality, the land acquisition is still not finished even today. In October, the consortium that will build and operate the plant -- which includes two Japanese companies and a local coal producer -- failed to meet its financing deadline for the fourth time.

     An executive of an international power equipment supplier pointed to the adverse effects of Widodo's corruption crackdown, another pillar of his reforms. "Under the new president, bureaucrats have become reluctant to do procurement or construction tenders. They fear any interaction with bidding companies may be scrutinized by the Corruption Eradication Commission (KPK)."

 

More red tape

Soon after his inauguration, Widodo pledged to make his country investor-friendly by cutting red tape. During a speech at one international conference, Widodo even said to foreign investors that if they had any problems, "call me."

     So far, he has struggled to live up to his words. Foreign executives are concerned about the inconsistencies between the president's words and recently enacted regulations. Take, for example, a new regulation rolled out by the Ministry of Manpower at the end of June. One clause requires a board member of an Indonesian company or a joint venture with one to obtain a work permit, even if he or she lives outside the country. Obtaining the permit is time consuming, but foreign executives worry that the parent company might need to decide to either decrease their seats on the board of their joint venture, possibly losing their majority, or start bearing the extra cost of having board members live in the country.

     According to a foreign lawyer, ministry-level regulations on foreign employees have been getting tougher for the past few years. The number of foreign workers in Indonesia declined to 68,762 as of 2014, about 3,700 fewer than in 2012. A manager at a Japanese bank said that a further reduction in the number of expatriates will make it difficult to transfer know-how and skills to their Indonesian employees.

     In another example, the government has banned alcohol sales at convenience stores and other small retail shops since April. This led to plunging profits at Multi Bintang Indonesia, the nation's largest brewer. The company, which is owned by Heineken International, may be forced to review its expansion plans. Michael Chin, its president, said unclear regulations "have created confusion of what is allowed and what is not allowed."

     Mitra Adiperkasa, a franchise store operator for more than 150 foreign brands in Indonesia, including Starbucks and Zara, is suffering due to import tax hikes put in place in July on clothing and other items. The hikes were intended to help the local manufacturing industry. But a Mitra spokeswoman said it had no choice but to raise prices on imported clothes, which hurt sales already sluggish due to weak consumer appetite. "We don't really anticipate a recovery until the second half of 2016," she said.

 

Long way for bureaucracy reform

To facilitate new investment, Widodo launched a "one-stop service" at the office of the investment coordinating board (BKPM), aiming to speed up the process of obtaining investment permits, which was scattered across various ministries. But a lawyer said he has dealt with cases in which officials at BKPM were unable to answer inquiries from the companies, and directed them back to the relevant ministries. The idea was good. But for it to be effective, it required comprehensive changes in all related regulations and approval procedures.

     The government and the legislature have even tried to weaken the power of the KPK, the corruption crackdown body, by drafting a bill to amend related laws. So far Widodo has been rejecting such moves. But this shows how corruption is built into every part of the government and that there is a long way to go for the president to clean up his own government.

     Despite dismal progress in structural reforms, foreign direct investment has so far continued to grow by double digits -- up 16% for the first half of the year, to 174 trillion rupiah ($12.9 billion). But external headwinds are putting downward pressure on the country's economy. A vicious cycle of the slowdown in the Chinese economy and commodity price declines is hitting its commodities exports, which have been Indonesia's main growth drivers. The Asian Development Bank and the World Bank both predict this year's GDP to grow below 5% for the first time since 2009. The slowdown could dent foreign investors' interest.

     On the domestic front, high inflation has weakened consumers' purchasing power. The central bank's Consumer Confidence Index, based on a monthly survey of consumer sentiment on the economy, fell below 100 in September for the first time since 2010. Figures under 100 indicate pessimism. The gloomy outlook is reflected in reports on job cuts and unemployment, which have become increasingly visible in local media.

     Since September, Widodo's administration has introduced several economic stimulus packages to prop up the economy, including deregulation, easing credit requirements for rural workers and small cuts in energy prices. "It seems like the government has finally realized that there is a level of urgency," said Sebastian Tobing, head of research at local brokerage Trimegah Securities. But pessimistic analysts say most of the measures, such as a 3% cut in diesel fuel prices, lack impact, and the effects on the economy will be minimal.

     To keep market confidence from completely evaporating, Widodo has to work harder to dissipate the haze around him, and display a clearer vision of how to make structural progress amid the increasingly difficult global market and economic conditions.

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