Thu, 30 Jul 2015
Less than one year into his term as Indonesian president, Joko Widodo faces a difficult set of challenges, both political and economic.

The first, overseeing a cabinet reshuffle, requires some deft handling. Some of his ministers have failed to perform, so he must balance the demands coming from members of his ruling coalition against the need to appoint nonpartisan professionals to a new cabinet. This is easier said than done.

Undoubtedly Mr. Widodo will feel obliged to cater, at least in part, to vested interests such as the business and political interests of his ruling alliance. But the president’s real test will come when it comes to appointing individuals to lead economics-related ministries. As these occupy the commanding heights of the Indonesian economy, they are also the most highly prized positions for political patrons.

Getting this delicate balancing act wrong poses a huge risk: If the president overreaches in trying to appease leaders of his coalition and gives away the crown jewels of the cabinet, Mr. Widodo could end up with another mediocre cabinet—or worse. The electorate would not blame political party leaders for their economic woes, as they’ve done so far. Instead, they will blame Mr. Widodo.

On the other hand, if Mr. Widodo manages to find and select some of Indonesia’s best and brightest to run the economy, he might gain more enemies from the ruling coalition. But he would win kudos from the electorate and, even more important, from the business community.

Mr. Widodo’s second task is to figure out how to jump-start a faltering economy. Despite what the president or his advisors may wish to believe, an economic storm is brewing.

Continued and persistent global economic uncertainty, a lower-than-expected growth trajectory for China’s economy, a bottoming of commodity prices and a loss of investor confidence in Indonesia all show that action is urgently needed.

The economy is set to grow less than 5% in 2015. Growth over the past two quarters has been negative, and it’s possible we have not yet reached bottom. And although exogenous factors can partly explain our slowing economy, a large part of the blame rests with Indonesian government policies, many of them left over from previous administrations.

One lesson that Mr. Widodo should learn from his earlier days in office is that trying to do too much often amounts to less. His so-called “working cabinet” was long on policy intentions but seemingly without any sense of purpose or priorities. Such a laundry-list approach to policy making makes for good public relations but not much else. Now is the time to prioritize.

Instead of trying to do everything at once, a wiser approach would be to ask: What are the most critical, binding constraints on economic growth today, and how can we remove those constraints in the most expedient way?

The most obvious constraint on the Indonesian growth story, and one that Mr. Widodo needs to address immediately, is low infrastructure spending. More than half a year into the budget, only 8% of allocated state funds have been spent on new infrastructure. Clearly there are serious bottlenecks. If left unaddressed, these pose a serious threat to the economy, both in the short- and medium-term.

Luckily, there is a quick fix. Mr. Widodo could have his economic advisors arrange for a revaluation of assets currently held by the larger state-owned enterprises. Many of these are undervalued, so once they are properly valued, SOEs could raise their own financing for infrastructure projects by issuing local and global bonds.

With a weak currency and excess industrial capacity at 30%, there is real potential for increased exports. But exporters are constrained by a lack of credit facilities. If the Widodo administration uses state banks as a vehicle to aggressively expand credit for exporters, it could see quick results with relatively little effort.

Finally, the government needs to address a decline in consumer spending. This is partly due to a lack of confidence in the economy, but it is also a result of food-commodity inflation. The typical Indonesian household has less disposable income after spending on basic food commodities, mostly due to supply-side problems.

Those supply constraints aren’t due primarily to lower domestic production, but to import quotas. Most of these quotas are held by a “food mafia” that controls the import of basic food commodities and then sells them at a premium. Removing those quotas would quickly result in lower food prices and boost consumer purchasing power.

The vested interests that have been profiting from the quotas will no doubt protest such a move. They will use the banner of nationalism as an excuse when arguing against the lifting of quotas. Mr. Widodo should understand that standing up to vested interests and exerting his presidential authority for the common good is the key to his success as president.

Mr. Ramli is chairman of Bank BNI and a former coordinating minister for the economy and minister of finance.





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