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Widodo's support erodes as economy sags, infrastructure projects stall

With his first term half over, Indonesia's president can boast some successes

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Indonesian President Joko Widodo attends a groundbreaking ceremony for the Jakarta-Bandung high-speed railway line in West Java province in January 2016.   © Reuters

JAKARTA Indonesian President Joko Widodo has completed the first half of his five-year term that began in October 2014.

The country's first head of state from neither the establishment nor the military, Widodo, who is popularly known as "Jokowi," has achieved a degree of success in one of his pledges, to narrow domestic economic gaps. But his infrastructure development plan, worth 5,000 trillion rupiah ($375 billion), is far behind schedule due to financial shortfalls. Poor infrastructure has been the bottleneck of the Indonesian economy, and how much Widodo can make up for the delay in his remaining two and a half years will affect his chances for a second term.

U.S. Vice President Mike Pence and his Indonesian counterpart Jusuf Kalla attended the signing of a memorandum of understanding on April 21 in Jakarta for business deals worth more than $10 billion between U.S. companies and the Indonesian side. The 11 agreements include one by Exxon Mobil to sell liquefied natural gas to state-owned energy company Pertamina; another by Lockheed Martin to provide upgrades to the Indonesian Air Force's F-16s; and one by General Electric to develop electrical infrastructure.

"U.S. companies face many barriers and difficulties in the Indonesian market, including intellectual property, the lack of transparency and requirements in manufacturing to include local content to be able to sell products in the Indonesian market," Pence said according to local media. But he expressed appreciation for Widodo's efforts to reform the business environment. Pence and Widodo had agreed in their meeting the day before to strengthen bilateral economic cooperation.

Foreign companies are eager to do business in Indonesia, a country that is promising both as a production base and a consumer market, with the world's fourth-largest population of 260 million. Investment in the manufacturing and service sectors has remained robust. The information technology sector, including e-commerce, is also attracting growing investment.

"The Indonesian auto market will keep on expanding," said Warih Andang Tjahjono, who became president director of Toyota Motor Manufacturing Indonesia in April.

TAKING STEPS Widodo has eased foreign investment restrictions in hotels, logistics and other sectors to attract money from overseas. At the same time, he has introduced policies that seem to treat domestic companies preferably in the resources sector. A decree issued in January stated that if foreign companies want to continue exporting nickel ore and bauxite from Indonesia, they should hand over a majority stake in their operating companies to Indonesian businesses or the government. U.S. company Freeport-McMoRan, which operates the Grasberg mining district, one of the world's largest copper and gold mines, through a local affiliate, strongly opposes the decree.

"[PT Freeport Indonesia] expressed a sincere hope that this impending dispute with the government can be resolved but reserved all of its rights pursuant to the contract against the government, including the right to commence arbitration to enforce all provisions of the contract and to seek applicable damages," President and CEO Richard Adkerson said in a statement.

In spite of eagerness by foreign enterprises to invest in Indonesia, the Widodo administration's unclear policies are still obstructions for them. When Widodo took office, he pledged to raise the country's real-term economic growth rate to above 7%, but the actual figure has remained at around 5%. Indonesia boasts relatively high growth among major emerging economies, while slowing demand for real estate, luxury jewelry and other high-price items is dragging down the economy. Foreign direct investment has not increased much over the past several years, and it might be one reason for the unsatisfactory business climate in the country.

This situation has led to delays in infrastructure projects, and this is hurting the country's economic growth. A midterm economic development plan released in 2015 named infrastructure improvement as one of the top priorities to be realized by 2019. It presented numerical targets for 19 categories, including power generation, water supply and sewerage, roads, expressways, ports, airports, and broadband networks. But chronic tax revenue shortfalls have prevented the government from spending more on public works projects, while various restrictions hinder the entry of foreign and domestic private-sector companies. Indonesian laws require that the fiscal deficit be kept below 3% of gross domestic product. This helps maintain fiscal discipline and stabilize the rupiah. The downside is that it gives the government less leeway for budget allocation and prevents more investment in infrastructure.

Especially serious is the delay in a project to link Jakarta and Bandung with a 140km high-speed railway, a $5 billion joint venture between Chinese and Indonesian state-run enterprises through a public-private partnership. The joint venture was supposed to get financing from Chinese banks, but construction has made almost no progress for more than a year since it began in January 2016, because the companies have not secured funding. The government also plans to build power stations with combined output of 35,000 megawatts. But only up to around 19,000MW is likely to be ready by 2019.

FISCAL REFORMS The government has started fiscal reforms and implemented measures to increase tax revenues to finance infrastructure projects. The most drastic move was made in January 2015, when subsidies for gasoline were scrapped. Other fuel subsidies were also slashed. As a way to increase tax revenues, a tax amnesty system was introduced in July 2016 to encourage affluent people to come forward with their undeclared assets in exchange for a waiver of back taxes and criminal charges. The government estimated that assets worth 1,000 trillion rupiah would be repatriated from abroad, but only 147 trillion rupiah had actually been repatriated as of March this year. Tax revenues also have not increased as much as officials had hoped.

Although the government has room for improving economic management, it has helped narrow the economic gaps between Jakarta and rural areas. One of Widodo's major support bases is rural residents, and he has spent lavishly on development in the countryside.

In mid-March, the president attended the opening ceremony of a power plant in Mempawah on Kalimantan Island, 750km from Jakarta. "This area will no longer have power outages," he said. He is careful to find time in his schedule to visit rural communities. He spent a third of the first three months of this year outside the capital -- more time than his predecessors. "The administration has a strategy of hearing about problems from local governments and solving them quickly," Cabinet Secretary Pramono Anung said.

The country's Gini index, showing income inequality among a nation's people, has started to fall since Widodo took office. The index briefly topped 40, which suggests the possibility of social unrest, when his predecessor Susilo Bambang Yudhoyono was in office. But it fell to 39.4 in 2016. His desire to narrow income gaps is one of the reasons Widodo focuses on infrastructure development. So the delay in projects is a worrying factor for his reelection bid.

With an approval rating of nearly 70%, the president is drawing up a scenario for re-election. But the recent Jakarta gubernatorial poll may have been an upset for him. In the April 19 runoff, his close aide and incumbent Gov. Basuki Tjahaja Purnama lost to Anies Baswedan, who was backed by former military officer Prabowo Subianto, whom Widodo defeated in the 2014 presidential election. Some members of coalition partner Golkar supported Anies. The outcome will certainly give momentum to Prabowo, who may run in the next presidential election. The coalition led by Widodo's Indonesian Party of Democratic Struggle did not have a majority in parliament when he became president. The coalition accepted Golkar, which was the largest opposition party, in May 2016 to gain around 70% of the parliamentary seats. The gubernatorial election exposed the coalition members' fragile unity.

A recent International Monetary Fund estimate ranks Indonesia as one of the world's top 10 economies in terms of GDP based on purchasing power parity. The country has the potential to become an Asian economic powerhouse to rival China, Japan and India. But its history of colonization by Western countries has made Indonesian people wary of foreign capital. Many politicians prefer protecting domestic businesses to attracting foreign investment, and public opinion largely supports them. Improving the investment environment is no easy task. The president needs to make use of the funds and know-how of foreign companies, put the economy on a high growth track and lead the country to become a stable democracy. It is a hard task for the president, with only the second half of his term remaining.

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