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Widodo Seeks Indonesian Reboot as Currency Pressure Mounts

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James Bladen
James Bladen joined Alpha Southeast Asia in 2015. He has written on a wide range of issues covering capital markets, Islamic finance and M&A. He worked as a consultant in Indonesia (2013-2017) and moved to New York in 2020 where he continues to cover Southeast Asia.

Indonesian President Joko Widodo is going for a reboot.

The president, known as Jokowi, revamped his economic team in a cabinet reshuffle on Wednesday as China’s currency devaluation spurred further declines in the rupiah. On Friday, he will lay out a fresh plan to revive an economy growing at the slowest pace in over five years when he unveils the 2016 budget and makes his first state of the union address.

A former furniture manufacturer from humble origins, Jokowi took office last October buoyed by investor optimism he would bring effective governance and market-friendly reforms to Southeast Asia’s largest nation. Those hopes have been largely undermined by protectionist policies, simmering political tensions and an infrastructure drive that has yet to begin.

After months of pressure from Jokowi’s Indonesian Democratic Party of Struggle over the cabinet’s performance, Jokowi made six changes, turning to former Bank Indonesia Governor Darmin Nasution for economy minister. Tom Lembong, a Singapore-based private equity investor and adviser to Jokowi, became trade minister. Finance Minister Bambang Brodjonegoro kept his job.

“Jokowi has managed to balance some of his party’s interests with the things he wanted to do,” said Jakarta-based Douglas E. Ramage, country head for Indonesia at business advisory Bower Group Asia. “The new minister of trade was a very astute choice to counter a rapidly growing perception of protectionism. Lembong understands, and is committed to, Indonesia’s adherence to international trading law, as well as the importance of free and open trade.”

Realistic Budget

Lembong replaces Rachmat Gobel, who oversaw a steep increase in import tariffs on a range of consumer goods in July and has limited beef imports from Australia. Gobel also signed a decree restricting the sale of beer in the nation, unnerving companies.

The appointment of Lembong was positive, but it was too early to say whether he would be able to change the protectionist approach of the trade ministry, said Benedict Bingham, the IMF’s senior resident representative in Indonesia. The appointment of Nasution deepened the expertise and experience of Widodo’s economic team, he said in an interview.

Investors will be looking for a realistic spending plan next year that can be achieved. Predictions for economic growth and revenue in the current budget have been overly optimistic, leading to unfulfilled expectations and perceptions of inexperience in the economic team, said Juniman, chief economist at PT Bank Internasional Indonesia.

“The markets will be watching this very, very closely,” he said. “Up until now the government has always been very optimistic, ignoring the domestic and global economic conditions. Will we get more of this tomorrow, or a more realistic view?”

Stalled Projects

Jokowi said the reshuffle was needed to speed up the realization of stalled infrastructure projects and make the country more attractive to foreign investors.

“It’s impossible that our economy will grow only through budget spending, state-owned enterprise spending or private consumption,” Jokowi said in an interview with Metro TV broadcast late Wednesday. “We need capital inflows.”

Jokowi has often appealed to foreign businesses to invest in Indonesia, but has made little progress in fixing concerns over corruption, red tape and an uncertain legal environment. Foreign direct investment was $7.4 billion in the three months through June, little changed from a year earlier in dollar terms. Foreign funds have only bought a net $149.7 million of Indonesian stocks this year.

Efficient Spending

Government spending, expected to be the main driver of growth given a persistent slump in commodity exports, has been hampered by changes in ministries and bureaucratic inefficiencies. Indonesia has spent 48 percent of this year’s state budget, Finance Minister Brodjonegoro said on Thursday.

“The biggest expectation for Jokowi is that he will be able to spend and spend efficiently,” said Vaninder Singh, an economist at Royal Bank of Scotland Group Plc in Singapore. “If he can’t even spend, we won’t even get to see the efficient part.”

Ensuring coordination for that will fall to Nasution, a former tax chief with a doctorate in economics from Paris-Sorbonne University in France. He led the central bank between 2010 and 2013, cutting interest rates to a record low to support growth.

Jokowi made Luhut Panjaitan, his chief of staff and a former commando, the coordinating minister for political, legal and security affairs. Another new cabinet member previously in government was Rizal Ramli, a former finance minister, who became the coordinating minister for maritime affairs, a portfolio that covers energy and mining as well as fisheries.

“There is enough in the new cabinet for investors to at least give him the benefit of the doubt,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore. “The retention of the finance minister should keep expenditure disbursement as on track as possible.”

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