Indonesia pins its hopes on Jokowi 2.0

Indonesia’s president Joko Widodo

Within just months of winning a second five-year term earlier this year, Indonesia’s president, Joko Widodo, had promised one of the boldest moves imaginable: the relocation of the country’s capital.

In his state of the union address, delivered to parliament in August, Jokowi (as the president is known) outlined plans to uproot the entire apparatus of government from Jakarta, with its traffic jams and choking pollution, and move it wholesale to the province of East Kalimantan. 

The idea, first floated in April, came as a surprise: Jokowi aims to complete the move by the end of his second term in office, which expires in 2024. 

(For what it’s worth, few expect the process to be started before the end of 2020, or completed before 2030.)

But can the leader of the world’s largest Muslim-majority democracy, who was re-elected comfortably with over 55% of the vote, be as bold in his other policies? 

He has promised to deliver higher growth, boost state spending, tackle a persistent trade deficit and eliminate laws that have long hindered inward foreign investment. Such promises are familiar fare: Widodo’s predecessors also pledged reforms, yet progress has been slow.

Top of Widodo’s to-do list is reviving a stalled economy. In August, he forecast that output would expand by 5.3% in 2019, the fastest growth in six years, and slightly above the IMF’s prediction for GDP (flat at 5.2% in 2019 and 2020). Either way, the data is an indictment of the president’s performance, given that he came to office in 2014 pledging to boost GDP beyond 7% within his first term. 

His ministers regularly trot out the same excuses – global uncertainties, a slowing China – but Jokowi will have to work hard to dispel fears that growth has permanently plateaued.

“In most economies, 5% or thereabouts is healthy, but it’s not good enough for Indonesia,” says Roland Haas, director at HB Capital, a Jakarta-based boutique firm whose Komodo Fund invests in local stocks and Indonesia-facing companies.

“Everyone knows that in order to move to the next level of development, growth needs to be closer to 6% than 5%.”

That is easier said than done. In his first term, the president’s primary focus was infrastructure. A $355 billion programme included several wins, covering toll roads, power plants and the Makassar New Port in South Sulawesi, set to be completed in 2025 at a cost of Rp89 trillion ($6.3 billion). 

In March this year, the first phase of a mass rapid transit system opened in the capital, to the delight of workers in Jakarta’s financial sector. It’s smooth, fast and air-conditioned, and has become something of a tourist attraction in its own right.

“The new rail line has literally improved my quality of life,” says Laksono Widodo, director of trading at the Indonesia Stock Exchange. “Before, I spent two hours in the car every day. Now, my commute is 20 minutes, door to door. It’s the first sign of Jakarta becoming a more civilized city.”

Paulus Sutisna, president director of DBS Indonesia, adds: “Jokowi has built toll roads, airports, dams – more infrastructure than I have seen for years.”

But piecing together a patchwork quilt of a country, with 264 million people scattered across 17,000 mostly underdeveloped islands, is a nightmare, and projects are often cancelled or delayed. 

The $6.1 billion Jakarta-Bandung high-speed rail line, a Belt-and-Road project backed by Beijing, courtesy of $4.5 billion in soft loans from China Development Bank, is running three years late, thanks to disputes over land ownership, and is unlikely to open before 2022. 

The World Bank puts Indonesia’s infrastructure deficit at $1.5 trillion and reckons the country needs to find an extra $100 billion in additional spending each year just to start to close the gap.

An even bigger challenge is convincing foreign investors and companies that Indonesia is a good place to put their cash to work. 

A key reason the country showed a record trade deficit in 2018 is that despite its many advantages – plenty of natural resources, a large, young and aspirational populace, the region’s only trillion-dollar economy – it simply doesn’t export enough.

There are three main reasons for this: poor infrastructure, a throttling regulatory regime and, in coarse terms, a national image problem. 

The first is a problem that will take decades to resolve. Manufacturers love the theory of producing in Indonesia, but too many are repelled by the reality. Indonesia’s roads are the 70th best in the world, the World Economic Forum reckons, lagging other regional sovereigns including Thailand (ranked 55th), Malaysia (19th) and Singapore (1st).

That has real consequences. In 2011, serious flooding in Thailand forced Japanese car-makers to cast around the region for alternative production centres.

“I accompanied one major firm around Indonesia,” says a former government official now working in the private sector. “They had $3 billion to invest, and came here to kick the tires, but when they saw it would take four hours to get from factory to port, the chance was lost.”

That might explain why, despite a decades-long effort to turn Indonesia into a capital goods producer, manufacturing is actually shrinking, accounting for 20% of economic output at the end of 2018, against 26% a decade ago.

Foreign direct investment targets the country: Japanese bank MUFG completed the $6.4 billion acquisition of additional shares in Bank Danamon in April this year, raising its stake in the local lender to 94% from 40%, while in June, Toyota said it would invest $1.9 billion to produce hybrid cars.

But Indonesia, which should be in prime position to benefit as Washington’s trade war with Beijing bites and as manufacturing shifts south, fleeing an ageing and costly Chinese workforce, is being left behind by a regional peer. 

Vietnam’s economy is a quarter the size of Indonesia’s, while its citizens are, on a per-capita basis, 65% poorer, according to IMF data. Yet Vietnam has worked hard to improve infrastructure and attract investment from Japanese, Korean and Chinese firms. 

Vietnam jumped from 93rd place in the World Bank’s 2014 Doing Business survey, to 69th place in 2018. And while Indonesia rose over the same period, it trails Vietnam, and even lost ground last year, falling to 73rd place. 

Investment data reinforces this divergence. Vietnam attracted $35.5 billion in FDI in 2018, against $22 billion for Indonesia, according to OECD figures.

“The difference between the two countries is that Vietnam has increasingly become an integral part of global supply chains, for example in export-driven, high-tech electronics, while Indonesia needs to catch up,” says Agung Prabowo, head of corporate client solutions at UBS Indonesia. If it can catch up, its economic growth will get a serious and much-needed boost.

But that is easier said than done. Hidebound by regulations that restrain rather than encourage free enterprise, Indonesia can be a hellish place to invest. 

High corporate taxes are the most visible barrier to large-scale investment, and Jokowi has pledged to cut the rate to 20% from 25%, putting it on a par with Thailand and Vietnam. He has also promised to cut the top level of income tax, which now stands at 30%. Jakarta has struggled for years to stop its citizens putting their wealth to work in Singapore.

A strong parliamentary majority should help him to tackle the labour laws that have long hindered inward investment. It’s easy to hire but painfully hard to fire, an issue that irks businesses of every size, and that has wider ramifications, given the low rate of productivity. Foreigners are a rare sight, even in Jakarta, because it is so hard to secure work permits. 

“It can take three months to get a six-month work visa,” says a European banker. “Jokowi might say: ‘We’re open for business’, but the department of immigration always has other ideas.”

Quotas require firms to hire multiple local staff for every foreigner, depending on the sector and size of the business. An archaic law also requires any foreigner living in the country to pay 30% tax locally on any offshore revenue stream, including property, which “acts as a major deterrent to FDI”, notes an investment consultant.

If Indonesia is to build on the success of its handful of fintech stars such as ticketing firm Traveloka, ride-hailing giant Gojek and e-commerce platform Tokopedia, the ability to attract and retain foreign talent is paramount. Before the end of 2019, the president is expected to lift curbs on inward investment in sectors including oil and gas, manufacturing, retail services and telecommunications.

And so to perhaps the biggest impediment of the lot. Most people spend little time pondering their country’s image. But it matters. Depending on the circle in which you walk, the US has been tarnished by its current president, as has Britain by Brexit and French president Emmanuel Macron by the gilets jaunes demonstrations. Indonesia’s problem is two-fold. On the one hand, it has an awful global image; on the other, it has no image at all. 

“It is a country with worse-than-terrible PR,” sniffs a local fund manager.

Starting with the second point. Ask yourself what comes to mind when Indonesia is mentioned. It’s not tourism – in an Asean context, you’re more likely to associate snorkelling and white sand beaches with Thailand, Malaysia or the Philippines. Nor is it cuisine, despite the country’s myriad spicy dishes.

In a regional context, Indonesia is invisible. 

President Widodo and his well-regarded finance minister Sri Mulyani Indrawati – a former managing director of the World Bank who returned for a second spell as finance minister in 2016 – are impressive and persuasive public speakers, yet they seem to shun the international limelight. Perhaps that will change now that Widodo has secured a second term.

Jokowi needs to speak out. Indonesia is a beautiful country that is doing a great job of destroying all of its natural wonder. Plastic waste is rife, as anyone who spends time on a Balinese beach knows, while loggers and palm oil producers are laying waste to its forests. Every year, Singapore is shrouded in smog as fires, the result of indiscriminate land clearance, rage across large parts of Sumatra.

Leaving aside fintech, and the impressive and enduring performance of Bank Central Asia and Bank Mandiri, two of Asia’s best-run lenders, few good stories ever emerge from the corporate space. 

Those of a certain age may recall the Asian financial crisis (AFC) in 1997, and the ensuing shuttering or bailout of dozens of shaky lenders. Others may remember Asia Pulp & Paper, controlled by the Widjaja family, which announced the emerging world’s largest corporate default in 2001, or the nasty feud between the Bakrie dynasty and the British financier Nat Rothschild.

For today’s readers, there is Royal Dutch Shell eyeing the sale of its stake in the $15 billion Abadi LNG project, after the government arbitrarily shifted it from an offshore to an onshore project, or MUFG narrowly dodging a $2.76 billion write-down on its investment in Bank Danamon. 

Shares in the Indonesian lender fell to an all-time low in the wake of its deal in April, briefly threatening to drag the Japanese group to its first loss since its formation in 2005, before rebounding.

Each of these cases has a nasty whiff of buyer-beware about it, and the cumulative effect is damaging. 

Companies love Indonesia’s promise but are deterred by its reality. The foreigners who made the country their home desperately want it to succeed, but all of them have tales about investors arriving with high hopes, only to depart, poorer and with their tails between their legs.

“Foreign investors are still wary about Indonesia – and they should be, as they always get screwed,” says a Jakartan who specializes in debt restructuring. “There are so many horror stories. Everyone has one if they stick around long enough. You’d think, 20 years on from the AFC, things would be better by now, but they aren’t.

“Indonesia’s problem is that other countries are much further along when it comes to legal arbitration and corporate governance,” he adds. “In Vietnam, if you’re going to get screwed, you know who’s going to come at you, and you can plan for it. In the Philippines, they don’t actively set out to screw foreign investors. But they do here, and you usually have 10 different people coming at you from every angle.”

Jokowi is a good guy doing a tough job. The main accusation levelled at him during his first five years in office – that growth, while good, never electrified – is one he now intends to address.

But when, during his August speech to parliament, he predicted a surge of inward investment thanks to the outside world’s “positive perception about Indonesia, and the improvement in the investment climate”, it raised a few eyebrows. 

Indonesia has so much going for it, yet it remains a country with an economy stuck in second gear and an image problem. If, as he embarks on his last term in office, the likeable president has a rabbit up his sleeve, it is surely time to whip it out.