Indonesia Report | Dangerous Summer

A wobbly administration and a plunge in commodities prices have triggered one of the nation’s toughest years in recent memory.

The honeymoon is over in two of Asia’s most populous countries, Indonesia and India. But only one may be headed for a trial separation.

Joko Widodo, who was elected president of Indonesia a little more than a year ago, is severely under attack—and not even by the opposition party. The reforms promised by the president—who is popularly known as Jokowi—have been slow to come, vexing factions within his own party. His plans have also riled the legislature in general, where his party is not dominant.

Amid the drama, investors are stampeding out of Indonesia. Many are taking shelter in the strong dollar ahead of the expected interest rate hike by the US Federal Reserve sometime this year. The country’s currency, the rupiah, has dropped to a 17-year low—harking back to the desperate days of 1997 and the Asian currency crisis.

But it’s not just external factors that are troubling the short-lived romance between investors and Indonesia. The on-again, off-again approach of the Widodo administration is giving pause.

The stutter is most apparent—and most frustrating—in the development of the country’s infrastructure. Jokowi funneled $1.2 billion into infrastructure projects in the first half of the year. That’s well below target. Likewise, infrastructure-related debt offerings by the government have fallen off.

Contrast that to Narendra Modi, who was elected as India’s prime minister last year and who has promised to fund the build-out of ports, highways and the like in the country. Since April, when the Indian fiscal year began, Modi has pledged investments of $9.8 billion, or 13.4% of India’s full-year budget, for infrastructure projects.

Moreover, Modi is turning to the capital markets to help fund a number of projects. Indian banks sold a record $3.9 billion of bonds tied to infrastructure in the year ending March 31. More recently, Adani Ports & Special Economic Zone raised $650 million via a bond offering in July.

Jokowi and his Indonesia Democratic Party of Struggle (PDI-P), however, intend to pay for Indonesia’s infrastructure upgrade mostly through government funds. The bucket includes money that was freed up after the country cut fuel subsidies. He’s also looking to raid surplus cash held by some state-owned companies.

So far, the approach has backfired. Jokowi’s investments are often delayed exactly because they are being channeled through government entities. The Indonesia leader seemed to be attacking the bottleneck in August when he said, “Sometimes even ministers cannot execute policy because big forces work against them.”

“Big forces” was generally considered to be a reference to legislative limits placed on Jokowi’s expansion plans. The divide among leaders in Jakarta has been a major disappointment to investors who expected a greater consensus under Jokowi.

Demographic factors are the structural long-term and long-lasting factors that will continue to support growth.

~ Gundy Cahyadi, DBS

“The agenda of the new government was well thought out, and the expanded fiscal space allows for bigger investment spending,” Piyush Gupta, the chief executive of Singapore-based DBS, said at a conference in Jakarta. “But unfortunately, all those good projects have yet to be put onstream.”

There’s no telling when—or if—those projects will get back on track. DBS’s head Indonesia analyst, Gundy Cahyadi, estimates that even if the government accelerates the pace of its infrastructure development, only about half of the projects planned at the beginning of the year could be underway by the end of the second half.

To be fair, not all of the Jokowi administration’s problems are rooted in Indonesia’s fractious politics and obstructionist bureaucrats. The collapse in commodity prices globally and the slowdown in China, Indonesia’s biggest export partner, have delivered the Indonesian economy a double whammy, according to Alicia Gárcia-Herrero, an economist at the Hong Kong unit of French bank Natixis.

Gárcia-Herrera estimates that, for every percentage point that China’s economy slows, Indonesia’s GDP growth contracts by 0.11%. But it gets worse. Gárcia-Herrera’s numbers factor in only the reduction in demand. As she points out, it’s not just that the amount of commodities shipped from Indonesia to China has shrunk, but lower volumes have been accompanied by lower prices.

Not surprisingly, Indonesia’s economy is groaning under the strain. In early July the World Bank rejiggered its projection for Indonesia’s GDP growth for this year to 4.7%, down from 5.2%. The multilateral lender expects private consumption, which makes up about 55% of Indonesia’s total economic growth, to hit the skids in the second half.

The slowdown in consumer buying is magnified by a stubborn inflation rate, which climbed to 7.5% in June, an outcome of the rupiah’s slide against the US dollar.

Gárcia-Herrero says the rise in prices has presented Bank Indonesia with a policy dilemma. With inflation above the central bank’s 3% to 5% target range, the bank will be reluctant to engage in additional monetary easing, particularly if the economy decelerates further. That’s a likely scenario if the US Federal Reserve raises interest rates and sends the rupiah into another tailspin.

For his part, DBS’s Cahyadi believes the rupiah’s weakness is owing more to US dollar strength than a fundamental sickness in Indonesia’s economy. He points to the country’s demographics as a way to calm nervous investors spooked by Indonesia’s half year of living dangerously.

“When you look at Indonesia, it has a young population at the median age of 32 years and a dependency ratio that may actually fall within the next five to ten years,” he says. “These demographic factors are the structural long-term and long-lasting factors that will continue to support growth.”

Another possible boost: Indonesia’s struggles with the US dollar may end up pushing the nation into the arms of China. China’s recently launched Asia Infrastructure Investment Bank will almost certainly offer a new avenue to infrastructure funding. And in July, Jakarta called on China to purchase Indonesian bonds as way to kick-start investor interest in the country’s debt.

The end of one marriage very often plants the seeds for another. Data Summary: Indonesia

Central Bank: Central Bank Indonesia

International Reserves


Gross Domestic Product (GDP)

$888.648 billion

Real GDP Growth




GDP Per Capita—Current Prices


GDP—Composition By Sector*








Public Debt (general government
gross debt as a % of GDP)




Government Bond Ratings

(foreign currency)

Standard & Poor’s


Moody’s Outlook

FDI Inflows

$19,241 million

$19,138 million

$18,444 million

* Estimates
Source: Country Economic Reports