Indonesian President Joko Widodo has declared war on inflation, with a series of pre-emptive strikes designed to woo voters. The potential casualty: his zeal for economic reform.
While price pressures are relatively benign in Southeast Asia’s largest economy, Widodo is leaving nothing to chance as a long election campaign draws near. He’s slapped controls on fuel costs and ordered additional imports of various staples from salt to buffalo meat. Even state-owned banks are doing their bit, and are expected to start selling rice this month.
Five months before the 2019 presidential race kicks off, the government is appealing to a country where more than 25 million live in poverty. But there’s a catch: economists see the measures as posing a threat to the nation’s budget and long-term development. They’re now questioning Widodo’s commitment to a praised reform program that’s helped secure sovereign rating upgrades and much-needed investment.
“These measures appear to be a backtracking of the Indonesian government’s fiscal reform agenda,” said Chua Han Teng, head of Asia country risk at BMI Research. “Energy subsidies as a share of total government expenditures may increase further over 2018 and 2019.”
Inflation is actually low by Indonesian standards. Consumer prices rose 3.4 percent in March, remaining comfortably within the central bank’s 2.5 to 4.5 percent target for this year. It was more than 8 percent when Widodo took office in 2014. Economists forecast it increased slightly in April to the mid-point of the band, with the data due to be released Wednesday in Jakarta.
That’s unlikely to cheer the government. To head off risks of higher food costs, it’s importing rice to boost stocks and opened the door to beef shipments from the U.S. and Brazil. Pressures could build in the run up to the holy month of Ramadan, as local Muslims stock up on food for evening feasts.
Widodo, known as Jokowi, has also ordered a freeze on power and fuel prices, with the government flagging that a subsidy on diesel may be doubled. The moves could undermine longer-term prospects for an economy that, while growing at 5 percent, is well short of the president’s 7 percent target.
“Widodo won praise at the start of his presidency when he slashed government spending on fuel subsidies by 90 percent,” said Gareth Leather, senior Asia economist at Capital Economics in London. “The change in policy could be the start of a shift towards more state intervention in the economy, which might deter badly needed foreign investment.”
Jokowi has vowed to develop every inch of the Indonesia archipelago as part of an ambitious infrastructure agenda worth hundreds of billions of dollars, which includes rolling out new rail, ports and roads. Some of those projects have now been shelved as the government struggles to find room in the budget to pay for his nation-building plans.
Challenge Awaits
With Jokowi set to face tough competition in next year’s election from Prabowo Subianto, his opponent in 2014, policy making is unlikely to improve in the near term, according to Leather.
“What’s more, there is little chance of seeing any progress on crucial land and labor market reforms, without which Indonesia will struggle to raise its growth rate above 5 percent.”
The country’s central bank has recently been more focused on the rupiah than inflation. Bank Indonesia has intervened in the market to defend the currency as it trades near a 27-month low against the U.S. dollar. However, the rupiah’s weakness threatens to heighten the inflation risk, raising the prospect of a rate hike if pressures persist.
While Jokowi’s price controls are likely to keep inflation in check, that may come at a greater expense, said BMI’s Chua.
“Other areas of spending such as public infrastructure spending would have to be reduced to keep the fiscal deficit within the legal limit of 3 percent of GDP, in turn hurting long-term development,” said Chua. The policies are “populist in nature.” – Bloomberg