WHAT A YEAR INDONESIA

Indonesia 2018 | DIPLOMACY | YEAR IN REVIEW

Indonesia is spending big in order to drive growth, but at what expense? Consumer confidence remains low, yet there are signs that investment may be paying off.

Indonesia is accustomed to growth. After registering GDP growth of over 6% from 2007 through 2012 (save a drop to 4.6% in 2009), the economy has posted growth rates of between 5 and 6% in each of the past five years. GDP for 2017 closed at 5.1%. Though still strong, this figure was below the Southeast Asia regional average, as Vietnam, the Philippines, and Laos all recorded growth of 6.7%, and Malaysia saw growth of 5.8%. President Joko Widodo, in office since 2014, pledged to bring Indonesia back to the days of 7% growth, figures not seen since the 1990s. In order to keep things moving, Widodo has made infrastructure investment the centerpiece of his economic plan, hoping to boost growth and create jobs in the short term and create efficiencies for longer-term economic expansion.

The government's public outlays on infrastructure have increased significantly over the past few years—budget allocation for infrastructure in 2017 represented a 177% increase over 2014. The administration's development plan calls for more than 3,000km of new roads and 3,000km of new railroads, along with local rail projects in several cities and the expansion and further development of 24 seaports and 15 airports to improve transit demands.
Spending is also increasing on energy projects, with government plans in place to install more than 35GW of capacity by 2019, including 109 power plants. Such large public spending has come at a cost, however. Slower growth over recent years has been used as an excuse to freeze public-sector wage hikes. And it is not just public-sector workers that are suffering. In 2015, the government introduced new minimum wage policies that were designed to prevent sharp increases that had in the past scared companies away. This has contributed, in general, to lower consumer spending and a lack of confidence in the economy. The country's consumer price index recorded inflation of 3.61% in 2017, according to the national statistical bureau. This value was within Bank Indonesia's target, and despite significant increases in electricity prices early in the 2017, officials were confident that it was prepared to remain between 3 and 4% in the immediate future.
With such an emphasis on government spending, observers have kept a close eye on the nation's budget deficit to see if it would come close to its legal cap of 3% of GDP. 2017 saw the deficit reach 2.57% of GDP, up from 2.49% of GDP in 2016. The slight increase in economic growth in 2017 is expected to bring the deficit down to 2.2% of GDP in 2018.
And while fiscal policy may seem like an eternal juggling act, Indonesia has had a far rougher time balancing expectations on the political scene. Throughout the course of 2017, President Widodo stayed true to his administration's promise to pursue a three-pronged diplomatic approach that focused on maintaining Indonesian sovereignty, protecting Indonesian citizens working abroad, and intensifying Indonesian economic diplomacy throughout the region and world at large. But the road has not been without its potholes. Not afraid to cross etymological swords with Beijing, in July Indonesia finally threw its hat in the fevered South China Sea ring by unveiling a new map that renamed the resource-rich area around its northern Natuna Islands the “North Natuna Sea.” An area that lies in the far southern stretches of what is more broadly known as the South China Sea, it was a calculated move to assert Indonesian sovereignty over its portion of the region's second-most critical flashpoint after North Korea. China reacted with typical fury.
Though Jakarta's ties with Washington under Trump are unlikely to be anywhere nearly as warm as they were under Obama, Vice-President Pence still paid a visit in April 2017. Coming on the heels of President Trump's oft-perceived “Muslim travel ban” and the president's inclusion of Indonesia on a list of 16 “trade hit list” countries with surpluses vis-à-vis the US, Pence left with 11 bilateral economic agreements worth more than USD10 billion involving major American giants such as Exxon Mobile, Lockheed Martin, and General Electric.
Another tricky affair is that of Malaysia and the 19 ongoing border disputes the two countries share. Despite disagreements, however, bilateral trade has seen a noticeable uptick to USD14 billion at YE2017, and was up 38% alone in the first five months of 2017 on the year before.