Indonesia: a slippery road to recovery

Southeast Asia’s largest economy is unlikely to see a V-shape recovery. Instead, it’s going to take a year or two before its economic policies bear fruit, says the IMF.
Joko "Jokowi" Widodo
Joko "Jokowi" Widodo

It is unrealistic for Indonesia to see a V-shape bounce in its economic status due to recent headwinds, according to the IMF, moving against market expectations.

Instead, 2015 is going to be the year where President Joko "Jokowi" Widodo is going to lay the foundations for the country's new growth model, which will take a few years to bear fruit, said Jakarta-based Ben Bingham, senior resident representative for the IMF.

“We are only a 100 days in and this reform process is not like instant coffee,” said Bingham at Corporate Treasurer’s fifth annual Corporate Treasury & CFO Summit in Jakarta, adding that Indonesia's growth will be around the sub-5% mark in the first half of 2015 compared to the annual targeted growth rate of 5.8%. “Be patient…you need to see where it’s going and not focus on day-to-day instant results.”

The country’s new growth model includes establishing solid macro foundations on both fiscal and monetary fronts as well as the need to deliver employment opportunities, which will in turn improve the living standards for a bulk of the population, said Bingham.

The Central Statistics Agency (BPS) released Indonesia’s latest poverty data in January, which found that 27.73 million people, or about 11% of the country’s population, lived below the poverty line as of September last year. The agency defines being poor as living on less than Rp312,328 ($25) a month.

Although the number of people living below BPS’s “basic needs” poverty line fell from 28.8 million (11.25%) in March 2014, Bingham says the declines have been too slow.

Additionally, the government needs to address vulnerabilities within the financial system, such as its high private sector external corporate debt, which has ballooned in recent years to a whopping $161 billion, or 54.8% of total external debts in the economy, surpassing the government’s at $134 billion, according to the latest data from the country’s central bank, Bank Indonesia (BI).

Once these concerns are ironed out, the country’s economy is expected be back on track to delivering growth around its real potential levels of 6.5% to 7% in the future, Bingham said.

In fact, the government has been proactive in addressing some of these issues. BI announced last October that Indonesian companies holding foreign-denominated debt must hedge their foreign exchange holdings against the Indonesian rupiah with a ratio of 20% in the period January 1, 2015 onwards in an effort to limit risks stemming from increased private sector external debt. 

“Given the global risks, the BI regulation on foreign borrowings is highly relevant today,” said Juda Agung, executive director for economic and monetary policy department at BI, at the conference.


Indonesia’s pace of recovery has been hampered by the emergence of recent global headwinds, including the fall of oil prices to below $50 a barrel and China’s slowing growth. What this translates into is weaker conditions for commodities, which account for 50% of the Southeast Asian country's exports.

The decline in oil prices will limit Indonesia’s fiscal muscle, which was beefed up as a result of the country’s recent reforms on fuel subsidies.

This brings the country back to square one. “This essentially wiped out the fuel subsidies that were created before,” Bingham said. “The country needs to increase the target for non-oil revenues but it’s difficult if not impossible to raise non-oil revenues quickly in a slowing economy and will take three to four years to play out.”

In December, Indonesia capped the diesel subsidy at Rp1,000 ($0.08) a litre, effective January 1, and said the prices would rise and fall in line with market prices on a monthly basis. The government also scrapped aid for gasoline, the biggest changes to a decades-old system that has tied up budget funds and bloated energy imports.

Alternatively, Bingham said Indonesia could reduce its original targeted capital expenditure of 2.2% of GDP for 2015, and make sure that the expenditure is allocated to high-priority projects.

“The government needs to be aggressive in tackling supply bottlenecks by building the proper infrastructure,” said Bingham. “This will improve the business climate.”

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