Indonesia's economy and the election
So far so good
Jan 8th 2009 | JAKARTA
>From The Economist print editionThe president has quite a good crisisWITH only
>three months until parliamentary elections, Indonesia’s
six-month-old campaign has moved up a gear. For once, thanks to the
global economic slump, it is as much about substance as about style and
personalities. And, unlikely as it seemed six months ago, President
Susilo Bambang Yudhoyono’s government can hold its head pretty high.
The data suggest the fourth-quarter slowdown in Indonesia was much
less pronounced than elsewhere in South-East Asia. Economic growth for
2008 as a whole is likely to exceed 6%. Many other indicators are also
robust. The 2008 budget deficit was 0.1% of GDP and the government has
earmarked $3.5 billion to spend on tax breaks and infrastructure
projects.
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In late 2008 the currency, the rupiah, lost a fifth of its value
against the dollar, but the slide has halted. The cost of insuring
Indonesian government bonds against default has come down sharply.
Inflation, still running at an annual rate of 11%, is falling, enabling
the central bank this week to cut its benchmark interest rate by
one-half of a percentage point, to 8.75%.
Most banks are healthy, thanks to radical reform after the Asian
crisis of a decade ago. And in 2008 the country achieved rice
self-sufficiency for the first time in 24 years. Manufacturing is
starting to feel the heat but only 25,000 workers have been laid off
since November. And, according to research by the Asia Foundation, an
American NGO, the huge informal sector has yet to feel much of an
impact of the crisis.
President Yudhoyono can certainly take some credit for all this. He
courted unpopularity by raising the prices of government-subsidised
fuel when oil was soaring last year, and has now been able to cut them
twice. Measures have been taken to support the financial sector and the
poorest in society, and his stimulus package will both offer tax
incentives and finance additional infrastructure projects. Moody’s, a
credit-rating agency, gave Indonesia a “stable” outlook in its annual
report this week, expecting the authorities to manage the impact of the
crisis competently.
Factors that have nothing to do with the president’s policies are
also helping. Domestic demand accounts for two-thirds of GDP, so though
Indonesia remains vulnerable to sharp falls in the prices of
commodities such as coal and palm oil, collapsing exports will not hit
it as hard as its neighbours. The lack of infrastructure development in
recent years means a few billion dollars will have a much greater
impact than it might otherwise have done.
The government, however, needs to get the funds flowing fast and it
is bad at disbursing money quickly. It also needs consumers to keep
spending. Here the signs are ambiguous. Many Indonesians are not savers
by nature. Yet carmakers, for example, are predicting a 25% contraction
in sales. Food producers are less gloomy.
However, Indonesia, which suffered worse than any of its neighbours
in the crisis of the late 1990s, has not yet weathered this one. It is
handicapped by the weakness of the rule of law, the poor investment
climate (see article), labour militancy and creeping protectionism.
The elections pose another hazard: the extent to which government
ministers are ready to put the country’s interests ahead of their
parties’ electoral prospects is in doubt. And then there are the global
unknowns that could wreak havoc. But Mr Yudhoyono is probably sleeping
better these days than most of his regional counterparts; and better
than he himself could have hoped just a few months back.
