Economy - Three Years Under Jokowi-JK
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Each President must have their own era and achievement, with different advantages and disadvantages. Indonesia\'s problems are mounting and complex. Many unfinished works are often handed over to the next government.
Therefore, it is a quite common for a change in national leadership to raise new expectations moving forward.
Not surprisingly, the transfer of Susilo Bambang Yudhoyono-Boediono’s leadership to Joko Widodo-Jusuf Kalla (Jokowi-JK) on Oct. 24, 2014 was warmly welcomed. Now, Jokowi and JK have led the country for three years amid uncertainties in the global economy and political issues.
Macroeconomic indicators
The Jokowi-JK Cabinet tends to run with a superfast rhythm of work and sometimes their target seems very ambitious. As a result, there have been pros and cons of the Jokowi-JK government during the three-year period. Some consider their work as very good, some say it is mediocre. Such responses are reasonable. All countries have their problems, and Indonesia, which has a myriad of accumulated economic problems, is no exception.
Therefore, it is interesting to review the performances of some macroeconomic and financial indicators during the first three years of the Jokowi-JK government, which often affects the real sector and the local financial market.
First, inflation is on track with a declining trend and relatively stable position. Inflation in 2015 fell significantly to 3.4 percent from 8.4 percent in 2014. The inflation further dropped to 3.0 percent in 2016, although at the end of 2017, it is expected to rise slightly to a range of 3.5 percent and 3.8 percent.
The low inflation is one of the reasons why the government had the courage to reform the oil and gas pricing policy in November 2014. The gasoline subsidies were reduced significantly, which resulted in the rise in the gasoline prices by Rp 2,000 per liter to Rp 8,500 per liter. The unpopular decision was very brave and against the current, as it was made when global oil prices were declining. Normally, the gasoline price should be reduced in line the global downward trends. The price was instead raised to reduce the gasoline subsidies.
It was fortunate for the Jokowi and JK administration. Not long after the rise in the gasoline, the world oil price dropped drastically to US$56 per barrel. As of January 1, 2015, the government was able to reduce the gasoline price to Rp 7,600 per liter from Rp 8,500. The low oil prices in the world enabled the government to remove the gasoline subsidy, although the diesel fuel still received a subsidy of Rp 1,000 per liter. This policy enabled the removal of the fuel subsidy hostage that had often become a major obstacle to the state budget annually.
The fall in gasoline prices has resulted in a gradual decline in prices of other goods and services, which can in turn reduce inflationary pressure. The condition is much different from the era when the gasoline subsidy was still in place. During that time, every time the government planned to raise the price of gasoline, prices of basic commodities went up first. Stockpiling of goods occurred, resulting in the scarcity of basic commodities in the market. This caused the prices to soar because inflation expectations were higher.
Second, the lower inflation caused the interest rate to decrease. This condition provided enough space for Bank Indonesia (BI) to lower its benchmark interest rate. BI\'s benchmark interest rate, which was 7.75 percent in December 2014, fell to 6.50 percent in July 2016. The benchmark rate was then replaced with a BI 7-day reverse repo rate, dropping to 4.25 percent in September 2017. It means that since 2014, BI has lowered the interest rate by 2.25 percentage points. The decline affected the decline in the 3-month deposit rate by 2.40 percentage points (from 8.94 to 6.54 percent).
This followed a decrease in interest rates on working capital loans and investment loans of 1.72 percentage point each (from 12.79 to 11.07 percent) and 1.45 percentage point (from 12.36 to 10.91 percent). Unfortunately, the decline in lending rates was relatively slower than the decline in deposit rates.
Third, the price of Indonesian government bonds increased significantly due to the downward trend in inflation and the rise of Indonesia\'s credit rating to an investment grade by Standard & Poor\'s (S&P) rating agency on May 19, 2017 after waiting for 20 years, following grades by other international rating agencies (Fitch in 2011 and Moodys in 2012). The rise in bond prices has resulted in government bond yields dropping significantly from 7.92 percent by the end of 2014 to 6.78 percent on Oct. 18, 2017. The interest of foreign investors in Indonesian bonds remained high as indicated by the rise in foreign ownership from Rp 406 trillion in 2014 to Rp 806 trillion as of Oct. 17, 2017, or about 39 percent of the total bonds.
Fourth, along with the improvement of investment attraction in Indonesia, stock prices also showed good performance despite fluctuating. The Composite Stock Price Index, which reached 5,227 at the end of 2014, declined to 4,593 in 2015. But in the last two years, it rose sharply, reaching 5,929 on Oct. 18, 2017. In other words, there was an increase of about 13.5 percent compared to 2014.
Fifth, the confidence of foreign investment on Indonesia continued to improve. This can be seen from the level of risk that has dropped significantly, as reflected by the decline in the five-year credit default swap (CDS). The five-year CDS reached its peak at 282 basis points (2.82 percent) on Sept. 29, 2015. It dropped to 158 basis points (1.58 percent) by the end of 2016. This year\'s five-year CDS further fell to 96 basis points (0.96 percent). It was the first time in history Indonesia recorded CDS under 100 basis points (1 percent).
And finally, the rupiah exchange rate against the US dollar was relatively stable, although it weakened from Rp 11,440 per US dollar in 2014 to Rp 13,514 per US dollar as of Oct. 18, 2017. The weakening of the rupiah was inevitable because of the strengthening of the US dollar against most currencies in the world. In the first year of Jokowi-JK\'s leadership, the rupiah fluctuation was very high, reaching 18 percent, higher than 2014, which was only 14 percent. However, the rupiah gradually stabilized with a fluctuation range of about 3 percent this year.
BI\'s policy requires the use of the rupiah for domestic transactions and hedging regulations for corporations, which have large foreign debts that help maintain rupiah volatility, in addition to an improvement in foreign investors’ confidence in the national economy.
Economic growth
Unfortunately, the glorious record of macroeconomic and financial variables has not resulted in convincing economic growth. Growth of only 5.01 percent in two consecutive quarters in 2017 is quite worrying to many parties. The real sector remains sluggish and people\'s purchasing power, especially from the lower income bracket to the poor, is very weak.
Actually, the 2017 economic growth was not worse than in 2016, but it has not been strong enough to support the Indonesian economy. The biggest problem is economic growth has tended to decline during the last five years since 2012. One of the triggers was the decline in prices of Indonesia’s primary export commodities (especially coal and palm oil) since 2011. Economic growth in 2011, which was recorded at 6.2 percent, fell slightly to 6.0 percent in 2012. The decline continued in 2013 to 5.6 percent and to 5.0 percent in 2014. Then, at the beginning of the reign of Jokowi-JK, the growth fell again slightly to 4.9 percent in 2015.
The growth only slightly improved to 5.0 percent in 2016 and it is feared it will be stagnant at the level of 5 percent.
The government is well aware of this condition and wants to immediately change the existing economic structure. The household consumption, which has led to domestic economic growth for more than a half a century (56 years since 1960) seems to be saturated. To shift the source of growth from consumption to investment is not as easy as turning the palm of the hand. Reviving the manufacturing industry is also difficult. Inadequate or even poor infrastructure facilities inherited by the previous government have become a burden of the current administration.
To that end, the solution is to carry out massive infrastructure development in a number of areas. The government’s serious commitment to immediately close the infrastructure gap has been very visible in the last two years with a huge budget allocation. As the deficit in the state budget is widening, the government must set a high target of tax revenues, at a time when the economy is still in a weak condition.
The massive infrastructure development should be an effective economic stimulus to encourage private businesses and the real sector to move and expand. However, unfortunately, the direct impact of the infrastructure development is minimal to the current economy. There is inadequate employment in the infrastructure sector and private sector involvement as a government partner is also relatively limited.
No wonder, then, has infrastructure development begun to raise questions, especially related to its benefits. We hope that the positive impact of infrastructure development will not only be seen in the medium and long-term, but also the short-term.
No one doubts that infrastructure development will be able to bring the Indonesian economy into its golden age. However, short-term problems should be immediately overcome to smooth the achievement of medium and long-term targets.
Let\'s wait and support the effectiveness of the remaining two years of Jokowi-JK administration in creating a strong and solid foundation for the economy in the future.
ANTON HENDRANATA
Chief Economist of PT Bank Danamon Indonesia Tbk
