Indonesia’s economic slowdown seems to be going from bad to worse with economists and business leaders blaming a lack of confidence in Joko Widodo government’s policies as much as plunging exports and a drop in domestic consumption for the deepening malaise.

Economic nationalism has become an impediment to economic growth. Indeed, the President’s criticism of international financial institutions at April’s Asia-Africa Conference in Bandung may have pleased the nationalists, but it will do nothing to attract foreign investment.

Starting from an ambitious 5.8% under the Yudhoyono administration, government and World Bank annual economic growth projections for Indonesia are now down to 5.2–5.3%, with expectations that they’ll drop further in coming months.

Based on weaker-than-expected first quarter of 4.7%, the International Monetary Fund (IMF) has already downgraded its full-year growth forecast to that level, the lowest since the 4.5% recorded in 2009 in the wake of the global recession.

Five international institutions also see annual growth at below 5%, ranging from 4.9% for Goldman Sachs to 4.4% for JPMorgan, with Indonesia facing a combination of a terms-of-trade shock and a potential tightening in external financing conditions.

Hurt by low commodity prices and a slowdown in China, exports in May dropped by 15.2% year-on-year, and nearly double the previous month’s figures. While there was still a trade surplus for the sixth straight month, it was because imports fell by 21%—similar to the 22.3% drop recorded in April.

Retail spending may be holding up for now, but high interest rates have undermined Indonesians’ purchasing power, with May’s statistics revealing another sharp fall in car and motorcycle sales.

Lower cement consumption over the past five months is yet another sign of declining economic activity, despite the fact that Jakarta is now in the throes of the biggest infrastructure building boom of the past two decades.

Bank Indonesia is committed to high interest rates to keep inflation and the current account deficit in check and also to limit capital outflows ahead of the ever-present fear of a further monetary tightening by United States and European financial regulators.

Widodo’s political honeymoon has been shorter than expected because of his rift with Indonesian Democratic Party for Struggle leader Megawati Sukarnoputri and his inability to stop conflict between the police and the Anti-Corruption Commission (KPK).

But while he may have managed to partially repair his relationship with the overbearing matriarch, at least until a pending Cabinet reshuffle, critics are now fully focused on the economy, complaining about a lack of strategic vision and policy coordination.

Ministers often pull in different directions. There’s no better example of this than the way the Investment Coordinating Board (BKPM) is trying to attract much-needed foreign investment, while the Manpower Ministry is making it increasingly difficult for foreigners to obtain work permits.

Widodo’s bold move to remove fuel subsidies late last year has now raised concern over the way the Government has failed to manage global oil price fluctuations and to educate Indonesians over how the world market works.

The savings resulting from the price hike were pumped into this year’s US$23.2 billion infrastructure program, but spending—the bugbear of all Indonesian governments—was sluggish in the first quarter and is showing few signs of picking up in the second quarter either.

Some of the oil windfall may also have to be diverted to shore up what the World Bank predicts could be a Rp 282 trillion shortfall in total state revenue. That’s because the Rp 1,295 trillion (US$98.8 billion) taxation target—a whopping 30% increase over last year—has always looked too ambitious for a country with a tax-to-GDP ratio of only 11%.

More so because efforts to broaden the tax base don’t appear to be making any ground. Revenue collection in the first three months was the lowest in two years as the economic slowdown impacted on the earnings of many of Indonesia’s biggest companies, particularly in the palm oil sector.

International investors are backing off. One major Indonesian telecommunications firm on a recent roadshow through Singapore, Hong Kong and London found commitments it thought it had locked up two weeks before suddenly disappear overnight.

One former economic minister believes that as important as it may be to raise growth in the long-term, Widodo’s single-minded focus on infrastructure is a mistake and that what is now required are pump-priming measures to get the economy moving again.

The Government may be listening. This week it’s introduced tax breaks for companies whose expansion plans will create jobs and make significant contributions to exports. The same will apply to firms that re-invest their earnings in Indonesia.

Finance Minister Bambang Brodjonegoro is also relaxing down-payment restrictions on cars and property, and abolishing or reducing the luxury tax on a range of home appliances and other upscale items.

But a lot more than that will have to be done in coordinating policies and restoring confidence among foreign and local investors for the economy to get back on track and remove the gloom that has descended over Indonesia’s business community.

Prior to President Joko Widodo’s inauguration, one of his principal advisers lamented Indonesia’s weak state mentality. In a critique of Indonesia’s defence posture, which he characterised as ‘too passive’, he quipped to seminar participants that Indonesia’s South-China-Sea-located ‘Natuna [Islands] would be snatched and Indonesia forced to snatch them back again!’

Not so, if the more robust defence of Indonesia’s airspace is anything to go by. In the last few weeks, the Indonesian Air Force (TNI-AU) has scrambled its Russian-made Sukhoi fighters on three separate occasions to intercept civil aircraft traversing Indonesia’s airspace without necessary flight clearances.

Although Indonesia has scrambled its fighters previously in response to perceived incursions, three incidents in as many weeks is unprecedented. The incidents have undoubtedly provided the Sukhoi pilots from Makassar’s Sultan Hasanuddin Air Base with some useful combat training experience, but they also indicate a more muscular strategic posture by the Widodo government. Read more

The election of Jokowi is a good result for Indonesia, for Indonesia’s neighbours and for democracies in particular. State visits to democracies by a President Prabowo would have been dogged by protests. It’s also an indictment of Indonesia’s legal system that he was qualified to run after having confessed to kidnapping democracy activists in the late 1990s, 13 of whom have not been seen since. But it‘s also time for some sober reflection to ensure that analysis of the election and its aftermath don’t perpetuate some of the partisan and euphoric conclusions of some researchers both during and in the immediate aftermath of the elections.

In the lead-up to the election, Prabowo was depicted as a homicidal maniac intent on tearing down democracy and taking Indonesia back to a new New-Order Suharto-style kleptocracy. He was destined to be ‘Indonesia’s Putin’ or Hugo Chavez pushing an extreme form of economic nationalism. That interpretation of Prabowo’s character and intentions could be questioned but for the sake of this article let’s accept it. After all, his own words give some credence to that perception and he wouldn’t be the first world leader to forecast his evil intentions long before coming to power. However, the characterisation has led to a neat dichotomy of good versus the evil—Jokowi versus Prabowo, the little people versus the oligarchs—and that isn’t particularly instructive. Read more

With Indonesia’s presidential election scheduled for tomorrow, it’s already clear the incoming leader won’t suffer from any shortage of advice about priorities and directions. Within Indonesia, a recently-published pamphlet, ‘Memo to the President: Agenda untuk Pemerintahan Baru 2014’, written by Dr Satish Chandra Mishra, a prominent international economist, and Lieutenant General (Retired) Agus Widjojo, a renowned politico-military reformer, offers the new president a framework on how to re-energise the economy, finalise defence and security sector reform, and deal with past human-rights abuses.

According to Satish, the Indonesian economy needs politically-difficult reform to sustain and increase the rate of growth. Many of his recommendations require courage, especially his suggestion that foreign investment be allowed to break the power of ‘a few large trading families’ to stimulate the growth of the ‘missing middle’ level businesses. There are also familiar suggestions on ending fuel subsidies, fighting corruption, eliminating poverty, enlarging fiscal space to finance public infrastructure, promoting competition, creating the smart techno-savvy workforce of the future, and selling the program to the community.

Such an ambitious reform agenda would collide with the strong streak of economic nationalism that’s deeply embedded in the Indonesian psyche. True, the new president will have to address many of those issues, but the compromises he’ll have to make scarcely suggest optimum results. Read more