Uncertainty about global economic growth and about the monetary policy of key central banks (most particularly the US Federal Reserve) had - and still have - a big impact on Indonesia's financial markets. When weaker-than-estimated macroeconomic data from China is reported (strengthening the case for a persistent economic slowdown of the world's second-largest economy, and one of the key trading partners of Indonesia) or Federal Reserve officials hint at higher US interest rates, then we see capital outflows from Indonesia. Fortunately, such outflows are temporary and we always see a sharp rebound the next day or a couple of days later.

Compared to the day Jokowi was inaugurated, Indonesia's benchmark Jakarta Composite Index (IHSG) has climbed 6.7 percent from 5,073 points on 20 October 2014 to 5,413 points on 20 October 2016. The rupiah, however, has weakened 7.4 percent (against the US dollar) over the same time due to (looming) monetary tightening in the USA.

Capital outflows (or the threat of outflows) has also made the central bank of Indonesia (Bank Indonesia) decide (throughout 2013-2015) to raise its key interest rates. Apart from outflows, higher interest rates were also needed to combat Indonesia's high inflation and the widening current account deficit. Bank Indonesia's policy was good (safeguarding the country's financial fundamentals) but also dampened economic growth of Indonesia as credit growth fell sharply amid higher interest rates. Hence, amid global and domestic factors Indonesia's economy also continued the slowdown into 2015 (a slowdown that started in 2011).

But several important reforms were undertaken by the Joko Widodo government. Most notably, fuel subsidies have been scrapped drastically (especially gasoline subsidies). For many years international institutions (including the World Bank, International Monetary Fund, and the three big credit rating agencies) urged Indonesia to scrap fuel subsidies as they are a major burden on the government's budget balance (particularly as Indonesia's oil output has been on the decline over the past two decades) and cause a distorted economy (due to artificial energy prices). Supported by the globe's low crude oil prices it was a relatively easy move for Jokowi to scrap most of the fuel subsidies at the start of 2015 (while on earlier occasions and conducted by his predecessors fuel subsidy cuts would always cause public outrage and mass demonstrations).

Since September 2015 the Indonesian government has also been releasing a series of economic policy packages that include deregulation, fiscal incentives for investment as well as more room for foreign investment. In general, the packages aim at boosting Indonesia's economic growth. However, to what extent these packages have had success remains up to debate. The main bottleneck regarding these packages is that the central and regional authorities of Indonesia lack good cooperation and coordination. In the current era of decentralization, the regional governments have gained a lot of power and often the economic interests of both sides conflict. Moreover, the human resources at the local level (including local government officials) are still rather weak. But those who remain positive say that the 13 economic policy packages still require time to be fully implemented and have a full impact on the economy.

Economic Stimulus Packages of the Indonesian Government:

Package Unveiled Main Points
1st 9 September
• Boost industrial competitiveness through deregulation
• Curtail red tape
• Enhance law enforcement & business certainty
2nd 30 September
• Interest rate tax cuts for exporters
• Speed up investment licensing for investment in industrial estates
• Relaxation import taxes on capital goods in industrial estates & aviation
3rd 7 October
• Cut energy tariffs for labor-intensive industries
4th 15 October
• Fixed formula to determine increases in labor wages
• Soft micro loans for >30 small & medium, export-oriented, labor-intensive businesses
5th 22 October
• Tax incentive for asset revaluation
• Scrap double taxation on real estate investment trusts
• Deregulation in Islamic banking
6th 5 November
• Tax incentives for investment in special economic zones
7th 4 December
• Waive income tax for workers in the nation's labor-intensive industries
• Free leasehold certificates for street vendors operating in 34 state-owned designated areas
8th 21 December
• Scrap income tax for 21 categories of airplane spare parts
• Incentives for the development of oil refineries by the private sector
• One-map policy to harmonize the utilization of land
9th 27 January
• Single billing system for port services conducted by SOEs
• Integrate National Single Window system with 'inaportnet' system
• Mandatory use of Indonesian rupiah for payments related to transportation activities
• Remove price difference between private commercial and state postal services
10th 11 February
• Removing foreign ownership cap on 35 businesses
• Protecting small & medium enterprises as well as cooperatives
11th 29 March
• Lower tax rate on property acquired by local real estate investment trusts
• Harmonization of customs checks at ports (to curtail dwell time)
• Government subsidizes loans for export-oriented small & medium enterprises
• Roadmap for the pharmaceutical industry
12th 28 April
• Enhancing the ease of doing business in Indonesia by cutting procedures, permits and costs
13th 24 August
• Deregulation for residential property projects for low-income families

One of Jokowi's main challenges is to attract foreign investors. In the first two years of his administration, foreign direct investment (FDI) in Indonesia has only grown modestly by 4.5 percent (in US dollar terms). Red tape remains a major problem despite Jokowi's efforts (for example setting up the one-stop shop for foreign investment). Meanwhile, domestic investors have been hesitant to invest in business expansion due to Indonesia's weak purchasing power amid the economic slowdown (2011-2015) and high interest rate environment. This situation may start to change now as Indonesia's economy is finally accelerating and, in combination with low inflation, people's purchasing power and consumer confidence improve.

Another interesting decision was to launch the tax amnesty program in July 2016, a nine-month program that runs up to 31 March 2017. Through this program the government aims to collect additional tax revenue, enlarge Indonesia's tax base and see asset repatriations flowing to the domestic investment instruments. This program too had a slow start but after completion of the first phase on 30 September 2016, both asset declarations and additional tax revenue were a success. Asset repatriations from the so-called tax havens, however, were still disappointing and the government will need to do its homework (make it more attractive) to alter weak repatriations.

By reducing the energy subsidies and introducing the tax amnesty program, Indonesia's fiscal credibility has improved. Although the budget deficit is widening to around 2.7 percent of the country's gross domestic product (GDP) in 2016, this widening budget is primarily caused by productive public investment (in infrastructure and social programs), rather than (short term) consumption in the form of fuel subsidies. A "productive" budget deficit (or current account deficit) that generates future revenue streams is valuable but - as was the case under earlier administrations - when a large portion of the deficit is used for consumption (fuel subsidies) then it causes a structural imbalance.

Regarding infrastructure development, one of Jokowi's key pledges during his presidential campaign in 2014, we are mildly optimistic. The public budget for infrastructure development was raised considerably but there remain structural problems, most notably the difficulty of land acquisition (a costly and lengthy affair) as well as weak cooperation and coordination between the central and regional governments (the consequence of decentralization in the post-Suharto era). But Jokowi has been eager to push for infrastructure development. He has been present at the groundbreaking of several big projects (a strong symbolic sign), including the Batang power Plant, toll roads, and railways even though the land acquisition process had still not been completed (as local people refused to sell their land to the project developers). This shows that Jokowi prefers to look at the larger economic benefit of a project rather than the desire of local communities. Although this strategy gives rise to some concern about human rights, from a more macroeconomic perspective it is positive and boosts investor confidence.

Indonesian Government's Infrastructure Budget:

In conclusion, the first year of Jokowi in office was rather disappointing. Not because his performance was weak but rather he could not live up to the high expectations that greeted his election. Given the complex and fragile domestic and global (economic) environment there was no chance of forcing a quick rebound. But he did implement several key reforms such as fuel subsidy reforms (that on the short-term caused pain, but on the long-term cause gain). This strengthens the nation's fiscal credibility, room for productive public investment and perhaps an investment grade rating upgrade from Standard & Poor's (the last of the three big credit rating agencies that has not upgraded Indonesia's credit rating).

This transition is also visible in political and popular support for Jokowi. In the first year Jokowi could only rely on a minority in parliament as many political forces did not like the "new kid on the block" (contrary to his predecessors, Jokowi does not originate from the country's traditional elite or military). However, in the second year the second-largest political party of Indonesia (Golkar) threw its support behind Jokowi, turning his parliamentary support into a clear majority (nearly 70 percent). This should make policy-making a bit easier (although we have to emphasize that politics and governance remain a very complex matter in Indonesia).

Also the many surveys and polls show this change. While many Indonesians were disappointed by Jokowi's performance in the first year, the approval ratings are now shifting to positive territory, primarily due to inflation that cooled drastically from nearly 10 percent (y/y) after the fuel price reforms in late 2014, to around 3 percent (y/y) currently.

After a slow start and several reforms that caused short-term pain, there now exists plenty of optimism that Jokowi can lead Indonesia to the "promised land", especially if the global economic environment improves because rising commodity prices will automatically lead to poverty reduction in Indonesia. His earlier pledge of 7 percent (y/y) GDP growth by 2019 turned out to be overly optimistic (or an empty promise), but if he gets a second term after 2019 he could achieve this growth rate.

Macroeconomic Indicators Indonesia:

    2010   2011   2012    2013    2014    2015    2016¹
Gross Domestic Product²
  (annual percent change)
   6.4    6.2    6.0     5.6     5.0     4.8     5.0
• Consumer Price Index
  (annual percent change)
   5.1    5.4    4.3     8.4     8.4     3.4     3.1
• Public Debt
  (percent of GDP)
  27.4   26.6   27.3    28.7    24.7    27.0
Current Account Balance 
(percent of GDP)
   0.7    0.2   -2.8    -3.3    -3.1    -2.1    -2.2
• Poverty
  (percent of population)
  13.3   12.5   11.7    11.5    11.0    11.1    10.9
  (percent of work force)
   7.1    6.6    6.1     6.3     5.9     6.2     5.5
• Foreign Exchange Reserves
  (in billion USD)
  96.2  110.1  112.8    99.4   111.9   105.9   115.7³

¹ indicates a forecast
² Statistics Indonesia (BPS) shifted the basis of the computation from the year 2000 to 2010 and adopted a significantly updated methodology, hence GDP growth results between 2010 and 2014 have been revised in early 2015
³ at end-September 2016

Sources: World Bank, Statistics Indonesia, Bank Indonesia and International Monetary Fund (IMF)

This article was written by R.M.A van der Schaar, the Managing Director of Indonesia Investments. He obtained his Masters degree in Southeast Asian Studies from Leiden University (the Netherlands) with a major focus on the society, history and linguistics of Indonesia.