Indonesia’s Flailing Floor Plans
The Jakarta Stock Exchange’s tragic floor collapse, injuring visiting high school students, prompted management promise of an immediate “audit” into its cause at a time when investors are probing 2017’s lagging 20% MSCI Index gain against regional counterparts. While they do not consider the incident a possible metaphor for outright cratering, this year’s political, economic and banking system path will remain bumpy to block outperformance. Output passed $1 trillion, but 5% growth is below the 7% President Jokowi pledged after winning office. He faces re-election in 2019 and provincial polls this June, with rating agency Moody’s noting the calendar’s “likely slower reform momentum.” Rival Fitch upgraded the sovereign to BBB in December and praised monetary policy limiting volatility and capital outflows, but also cited poor government revenue collection and lingering “structural weakness.”
The President brought the Golkar party into the ruling coalition to advance his anti-corruption and infrastructure development agenda, and parliamentary speaker ally Setya Novanto now confronts bribery charges along with other members of the legislative and commercial elite. He has used several ruses to evade trial, although his behavior follows a 2015 pattern when a tape recording exposed an extortion attempt toward miner Freeport McMoRan. Jokowi was already in political peril after his protégé lost the Jakarta governor’s race amid allegations of Islamic blasphemy, as religious controversies continue to interfere with economic modernization initiatives including industrial sector external opening. Conservative clerics and protectionist advocates oppose further foreign entry into banking, where the ownership cap is 40%, despite administration overtures to China and Japan in particular.
The government and the World Bank forecast 2018 GDP growth to repeat above 5%, after commodity export recovery and increased capital spending offset tepid consumption last year. The trade surplus from coal, natural gas and palm oil sales hit a five year high at almost $12 billion, expanding reserves to $130 billion to cover eight months imports. The budget deficit came in barely under the statutory 3% ceiling, as Finance Minister Sri Mulyani Indrawati admitted tax targets were too ambitious to raise inflows to 15% of GDP, subpar by emerging market standards She said stricter enforcement, combined with simpler filing procedures, would not relent during the election season, and claimed that the broader anti-bureaucracy campaign at the core of Jokowi’s blueprint led to a 12% FDI jump in rupiah terms in the third quarter of 2017.
However natural resource nationalism is a pervasive influence smothering technocrat reassurance, and continues to scuttle multinational company plans. US miners Newmont and Freemont had to sell stakes and expand local investment, and state-owned Pertamina swallowed foreign energy assets. To fund these acquisitions, Indonesian public and private firms have accumulated foreign debt, which was up 9% to $350 billion or one-third of GDP last year according to the central bank. The government had $60 billion in bonds outstanding, 40% of the Emerging Asia total, as of last June and state enterprises have jumped in with rupiah-denominated “Komodo” issues to pay for deals and infrastructure projects the budget does not cover. The President’s $350 billion road, water and oil and gas development package quickly reached domestic limits with credit rising annually at a below 10% cautious pace, despite benchmark interest rate cuts through mid-2017. Banks were burned previously by state-directed corporate and personal lending, and are working to strengthen franchises with inflation in the 3-4% range and the currency steady at 13,500/dollar under regular intervention and tight trading rules.
The Financial Services Authority head Wimboh Santoso, formerly with the IMF, is now on a mission to attract additional outside Asian bank lines and presence to fill the gap, and the central bank recently opened a representative office in Beijing toward this end. The 40% international ownership lid dates from 2012, when Singapore’s DBS tried to gain control of high-profile Bank Danamon and was rebuffed. Japan’s MUFG in December agreed to buy it in progressive slices, first at 20% for $1 billion with an eventual goal of a complete takeover at $6 billion, provided Indonesian regulators waive the limit as they have for smaller deals. Santoso will decide the parameters and timeline and said he expects a “quantum leap” in products and services for approval, in contrast with the Jokowi era’s small financial sector bound.to date.
