2019: Year of Treading Water
by Wayne Forrest
Politics dominated 2019 as it was an election year characterized by a stormy Presidential campaign, violent demonstrations by supporters of the losing candidate (Prabowo), and a serene October inauguration. Economically, Indonesia tread water, reinforced its value-added and resource nationalism priorities, maintained its macro stability and 5% growth rate, continued some modest deregulations, but saw itself on the short end of countries attracting new foreign direct investment, especially from companies relocated production out of China. Consequently, towards the end of the year, after the President’s second term Cabinet was installed, the government began a course correction that will take shape in 2020.
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- GDP growth rate for 2019 hovered around 5%, the same as its been for the past several years, mirroring the average rate over the past 20 years. President Jokowi’s goal was 7%, the rate needed to absorb most new entrants to the labor market. As in the past, most of the growth is being produced by consumption rather than foreign investment or trade.
- The rupiah gained 3.73% versus the dollar, rebounding from 2018 when it lost 12%.
- Although Bank Indonesia (central bank) lowered rates several times and eased lending conditions in response to deteriorating external factors (from 6% to 5%), inflation remained low, averaging 3%.
- Further stability was gained via successful government bond auctions and other macro prudential measures.
- The average rate of inflation over 2019 was 2.72% reflecting the government’s food price stabilizations measures.
- Fiscal deficit widened to 2.2% of GDP, under Indonesia’s self-imposed 3% limit, but still a major concern heading into 2020. Slowing global growth contributed to lower commodity prices and lower tax revenues, which continue to be under target, notwithstanding the 2018 tax amnesty and inter-country sharing of tax data.
- The manufacturing sector, accounting for only 20% of GDP, remains a focus of government policy but without much headway. The textile/garment sector appears to be weakened by cheaper imports and a slowdown in overseas markets. Little progress was made on converting informal jobs to formal ones, as manufacturing remained stagnant and the corporate purchasing index dropped to 2016 levels.
- Garment makers grew exports 20% but lost ground domestically due to a flood of cheaper imports. As a consequence, higher tariffs were imposed in November.
- Cars sales were down in 2019.
- Indonesia’s equity market closed about 2% lower, year on year. Bright spots continued to be Indonesia’s digital companies: e commerce, fintech, and payments. The better positioned firms will be those investing in good cyber-security.
- The failure of state insurance firm Jiwasraya left 14,000 policies hanging as well as a stain on financial regulators.
- President Jokowi’s infrastructure build-out continued in 2019 with the successful completion of several toll roads, power plants, airports, dams, smelters. The President also unveiled a $33 billion plan to move the nation’s capital to a new city to be built in East Kalimantan by 2030.
- The digital economy was a bright spot, growing from $27 billion to $40 billion, generating new employment, and fostering greater financial inclusion.
- In September the President received a report from the Chief Representative of the World Bank in Indonesia that indicated that Indonesia’s was not the location for 33 investors relocating their production from China due to the US-China Trade War. The President’s rhetoric and Cabinet choices point to a renewed urgency for reform.
- USTR began a review of Indonesia’s eligibility to continue to receive benefits under the generalized system of preferences program (GSP). This program gives tariff reductions covering $2.1 billion (mostly manufactured products) of a total of $18.4 billion of Indonesia’s exports to the US. Commerce Secretary Wilbur Ross traveled to Indonesia in November 2019 to discuss GSP and other issues with President Jokowi. A decision is expected in 2020. If past reviews are any guide, Indonesia and the US will come to acceptable terms so that the benefits remain.
- The EU rescinded its program promoting palm-based biodiesel to be used in European power plants because of rainforest degradation. The program will be phased out gradually by 2030. Indonesia launched a WTO suit challenging the EU’s move. Meanwhile Indonesia ramped up its own biodiesel program requiring up to 30% palm-based fuel, the highest mandated mix in the world.
- After Indonesia moved forward its nickel export ban from 2022 to 2020, the EU filed a WTO suit, claiming the policy subsidizes its stainless-steel producers. Indonesia announced its intention to develop electric batteries and automobiles, attracting a Chinese battery maker.
- The April rematch of President Jokowi and Prabowo Subianto turned out not to be of any measurable substance. Jokowi won by 11 points, larger than his 2014 margin. Although on the surface the rhetoric between the candidates was heated their policy differences were minimal. In May deadly riots challenging the results marred an otherwise peaceful vote.
- Soon after President Jokowi was inaugurated in October he appointed his rival, Prabowo, Defense Minister, confirming that Indonesia’s political parties are heavily driven by oligarchic behavior. Only a few parties (and their backers) want to be left in opposition without access to ministry-driven patronage.
- For the first time Indonesia ran both Parliamentary and Presidential elections at the same time, a huge undertaking that was successfully managed. There was little evidence of vote tampering but plenty of evidence of vote “purchasing”, especially in non-urban regions.
- The lame-duck Parliament tried unsuccessfully to pass unpopular laws that spurred the largest nation-wide protests since 1998 and the fall of Soeharto. A new criminal code outlawing adultery, non-married couples living together, abortion, and effectively banning gay and lesbian relations was pulled and could be revisited in 2020. Also, left off the table was a new mining bill as well as a bill ending direct elections.
- However, a bill did pass that appears to denude the independent powers of the Anti-Corruption Commission (KPK). Although protesters demanded Jokowi revoke it through a Presidential decree, he seems unlikely to do so.
- Jokowi’s second-term Cabinet keeps a mixture of experienced hands and new faces. Sri Mulyani and Luhut Pandjaitan remain in their powerful positions as Minister of Finance and Coordinating Minister of Maritime (Mines and Energy). Two ministers under 50 from the private sector take on the important portfolios of Education and State-Owned Enterprises (SOE’s). Erick Thohir is already shaking up the management of important SOE’s such as the state electric company (PLN) and Nadiem Makarim (founder and CEO of tech unicorn GoJek) has been tasked with reforming Indonesia’s public schools and their curriculum to achieve what President Jokowi calls a “mental revolution”.
- The future of direct elections for the President as well as local governors was called into question by several major political figures including Tito Karnavian, the new Home Affairs Minister.
- A series of deadly suicide bombings in Surabaya and Medan, including women perpetrators, and the knifing of Wiranto, Coordinating Minister for Politics and Security, stunned much of the country and seemed to have drawn a line in the sand for President Jokowi.
- This was reflected in his appointment as Minister of Religion, Fachrul Razi, a former general, who favors non-religious attire in the workplace and a new plan to vet public employees who espouse radical Islamism.
- Protests and riots broke out across Papua and West Papua after an incident in Surabaya where Papuan students were labeled “monkeys” and “pigs”. At least 33 people were killed in the riots, prompting tens of thousands to flee the region and causing losses amounting to US$33.8 billion.
- Indonesian students achieved very low PISA Scores (an international test for 15 year-olds) compared to their peers worldwide and in southeast Asia. Out of 71 assessed countries Indonesia ranked 73rd in math, 74th in reading, and 71st in science. The scores dropped from the previous test in 2015. However, Indonesia has made strong strides in enrolling more children and achieving a basic literacy rate of 95%.
- The creativity of the 35 year-old Harvard alum Nadiem Makarim, who founded the ride hailing service GoJek, may bring fresh ideas and solutions (including technology) to the Education Ministry.
- The #MeToo movement arrived in Indonesia in the case of a university student whose rape ignited a national campaign against sexual harassment and victim blaming.
Indonesian leaders realize they have a demographic bonus, over 50% of its 270 million are under 30, but yet underemployment is chronic, and manufacturing jobs are not being created fast enough. President Jokowi began his second term in October 2019 seeking to reverse these trends.
Two key pieces of legislation slated for 2020 embody the government’s stepped-up posture to attract foreign investment: an Omnibus Bill on taxation and an Omnibus Bill on Job Creation. The implementing regulations for each bill would also be simultaneously drafted. The President believes that he has spent sufficient political capital with all but two political parties in his Cabinet, giving his coalition 75% of the votes on paper. However, Indonesia has no experience in enacting Omnibus Laws: they encompass thousands of article amendments and close to 100 laws. Both bills are slated for passage in 2020. If passed expect:
- Tax rates to fall from 25% to 20.
- Expatriates would not be taxed on worldwide income
- The negative list of investment would be changed allowing more generous terms for foreign investment
- Relaxed rules on penalties and pre-paid VAT
- Restrictions in the labor law would be eased to encourage manufacturing investment
- Overlapping and duplicative national and regional permitting rules for buildings and land will be eliminated and synchronized.
The tax law will probably pass first without a long deliberation; everyone loves to see taxes lowered. Due to the changes to labor rules, the bill on job creation will take longer and its entirely possible the President will face challenges from within his own coalition as well as street protests from workers. His own party, PDI-P, has in the past bucked changes to the labor law and its generous severance provisions. Given the heavy involvement of Indonesian conglomerates in political parties, easing rules regarding foreign investment such as opening sectors will also be a challenge. The President’s rhetoric since 2014 has been for ground-breaking reform but government policies have usually fallen short given his preference for consensus over confrontation. Furthermore, lacking a strong powerbase within even his own party, dominated as it is by its chairman former President Megawati, the President can get isolated if the longer-term interests of his supporters (i.e. the positioning of her daughter as a future candidate for high office) do not conform with his. In the end, the President will get the changes he is seeking, although they may be watered down.
GDP growth will remain in the 5% range but inflation will pick up and the rupiah will head back over 14,000 The potential for more rather than less volatility in Indonesia’s partners (EU/Brexit, US/election, China/Hong Kong/trade war) could push GDP growth lower.
President will make further positive management changes within his Cabinet, state-owned enterprises, while pushing ministries to perform better. These changes will mitigate a more threatening international environment, building on the strengthening digital economy.
Jokowi will resist efforts to amend the Constitution to end direct elections, even those from within his own party. If they come at all, they would be more forceful at the end of his 5 year term.
2020 will be a year of consolidation but not without the unpredictable effects of calculations of those seeking power in 2024.
The massive failure of the state insurer, Jiwasraya, is a potential landmine for the President. If there are no prosecutions, Indonesia’s reputation will suffer further, battered as is by the downgrading of the KPK (Anti-Corruption Commission) which has gone months without any arrests since its enabling law was revised. The President, however, reappointed Yasonna Laoly Justice Minister who has not focused on ending the judicial mafia that has led to many bizarre judgments against foreign companies. On the other hand, the respected new Coordinating Minister of Politics, Law, and Security, Mahfud MD, has promised a new truth and reconciliation commission to review long standing human rights cases, but has not yet addressed the issue of the malignant court cases that damage the investment climate. Combined with the anti-corruption commission’s loss of independence, unfortunately, fundamental judicial reform is not a priority.
(These views are the author’s and do not necessarily reflect those of AICC or its members.)