Indonesia’s balancing act
Never again. That’s the mantra of Indonesia’s class of 1998—the officials who were young adults when the country plunged into the Asian financial crisis that began two decades ago this month. The question now is whether their understandable caution could hold back southeast Asia’s biggest—and at times, most frustrating—economy.
Most retrospectives of the crisis era either begin with Thailand’s decision to abandon the baht’s peg to the dollar in July 1997, or offer generic lessons learnt by the region as a whole. Yet to get a feel for how visceral a shock the crisis was, and how powerful its legacy, you really need to look at Indonesia’s current leadership.
While many countries in the region underwent financial tumult and endured recessions, Indonesia suffered a complete political and economic breakdown; at times the country itself looked like it might break apart. It survived, but is now a fractious democracy whose 34 provinces jealously guard their expanded autonomy.
The crisis produced an economic policy framework geared towards preventing any similar financial and social breakdown. There are strict limits on budget deficits and government debt. The central bank guards its independence. The government has put in place a social security programme and national labour-relations law.
This system is presided over by a group of officials whose personal and professional lives were thrown into chaos by the crisis. Take Suahasil Nazara, chairman of the fiscal policy agency. At the time, Suah, as he is familiarly known, was on a scholarship to Cornell University in New York—a scholarship denominated in rupiah. When the currency plunged, he had to return home. Today, Nazara spends a lot of time thinking about how to shield Indonesia from capital-flow reversals and reduce its vulnerability to foreign creditors. He also administers a 2003 law that strictly limits the federal government’s deficit to 3% of gross domestic product (GDP).
The government widened its deficit estimate this month to 2.7%, up from 2.4%, and there’s pressure from parliament to bust the limit altogether in order to provide a fiscal stimulus. Nazara is sceptical. “We are going to be very, very careful with that,” he said in Jakarta last week. “We will try to make sure that if we increase the borrowing, it will be done very cautiously.” With economic growth projected to pick up next year, he just doesn’t see the justification.
He’s also wary of increasing the amount of government debt held by foreign investors. Between 38% and 39% of Indonesian government bonds are currently held by foreigners, Nazara says. Of that, about a third is held by what he calls long-term non-resident holders: insurance companies and the like who aren’t inclined to trade the securities regularly. The rest is largely portfolio investment, which makes him less comfortable. “The question isn’t the level, but how do you manage?” And, critically, who is holding it? He says the central bank knows “exactly who they are”.
The government is keen to reduce the amount of bonds denominated in foreign currency. Back in Suharto’s era, most bonds sold by Indonesians and local companies were in dollars. So when the rupiah began to weaken and, subsequently, collapse, the only recourse was to seek a rescue from the International Monetary Fund—with all the controversial conditions attached.
The economic team has reduced the amount of foreign-currency debt to less than half the total. Right now, 55% is in rupiah, according to Nazara. He wants to get that up 65%. The question is whether, by fighting the last war, Indonesia is missing out on future opportunities.
Retreat isn’t an option, of course: Nazara and other Indonesian leaders know they need to reconcile their caution with the need to be part of the international financial system.
But critically, they also need to find a way to attract enough capital to finance President Joko Widodo’s $350 billion infrastructure programme. While Widodo struggled to get infrastructure off the ground in his early years in office, momentum is now building. The government is speeding up projects, including an uninterrupted toll-road connection in the country’s main islands and construction of a 720km railway from Jakarta to Surabaya.
Such projects are vital to boosting Indonesia’s long-term growth rate. Failure wouldn’t spur a crisis similar to 1997-98, but would hamstring efforts to diversify the economy away from its reliance on commodity exports and create the kind of manufacturing jobs that would greatly expand its middle class. The Asian Development Bank estimates that emerging economies in the region will need to invest as much as $22.6 trillion through 2030 to build transport networks, boost power supply and upgrade water and sanitation facilities. The only way is to tap outside funding.
The same could be said of many parts of the Indonesian economy. Inequality has become a pressing political issue. Yet the only way to attract sufficient investment to create jobs and eradicate poverty is to get buy-in from foreigners—something nationalist-minded policymakers continue to struggle with.
The class of ’98 built a new nation out of the wreckage of the old, instituting reforms unique in the history of the republic. It would be a pity if the needs of Indonesia’s tomorrow were hemmed by an obsession with the past. Bloomberg View
Daniel Moss is the executive editor of Bloomberg News for global economics.
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