Newly elected presidential pair Joko “Jokowi” Widodo and running mate Jusuf Kalla, the pair that will guide Indonesia for the next five years starting from October 2014, propose to raise the target for economic growth in Southeast Asia’s largest economy from 5.6 percent to 5.8 percent in 2015. Furthermore, the pair would like to set a stronger average rupiah rate at IDR 11,600 per US dollar over 2015 (from IDR 11,900 as set in the Revised 2015 State Budget). Several reasons are behind these ambitious targets.
Accelerated gross domestic product (GDP) growth and a stronger rupiah are expected to result from increased investments (both public and private), more efficient use of government budgets, and an improved balance of services. This also implies that Indonesia’s traditional main pillar of economic growth - domestic consumption (specifically household consumption which accounts for about 56 percent of total economic growth in Indonesia) - will lose some of its significance toward economic growth.
Regarding the role of investments, Arif Budimanta, a member of Jokowi’s economic team, said that it is important that Indonesia manages to attract significant foreign direct investments (FDIs) in the real sector instead of portfolio investments. According to data from the Indonesia Investment Coordinating Board (BKPM), total investment realization in Indonesia grew 16.4 percent (year-on-year) in the second quarter of 2014 to IDR 116.2 trillion (USD $10.0 billion), the highest ever quarterly investment result. With market favourite Jokowi in the presidential seat, FDIs in Indonesia are expected to grow further.
Regarding services, Budimanta said that Jokowi would like to enhance the role of the communication, transportation and tourism sectors in the domestic economy.
Meanwhile, Jokowi announced to make efforts to increase state income through enhanced tax revenues. He specifically emphasizes the need for an electronic online tax system to make the system more transparent. Indonesia is currently still characterized by a low tax-to-GDP ratio (about 12 to 13 percent) as the structure of tax revenue in Indonesia has not changed in the past decade. Emerging countries typically contain low tax-to-GDP ratios as the government’s financial management is inadequate (and plagued by corruption). However, Jokowi realizes the importance for Indonesia to raise this ratio in order to assemble more financial means to finance the budget deficit, infrastructure development, healthcare, education and other social programs to combat poverty.
Whether an average rupiah rate of IDR 11,600 in 2015, as proposed by Jokowi and Kalla, is realistic is doubtful as the US Federal Reserve is expected to raise interest rates and which will most likely lead to another round of capital outflows from the stock and financial markets of emerging economies, including Indonesia. These developments in the USA will thus put pressure on the rupiah. Moreover, currently the rupiah still has to cope with high pressures brought on by the wide current account deficit. Since late 2011, the current account deficit of Indonesia has become structural due to a large deficit in the country’s oil and gas trade balance. This will take structural reforms to improve the current account and thus cannot be fixed quickly.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) appreciated 0.22 percent to IDR 11,682 per US dollar on Thursday (28/08). This year so far, the rupiah appreciated 4.2 percent against the US dollar, thus being one of the best performing emerging market currencies in 2014. The main reason for this solid performance is market participants’ approval of reform-minded Joko Widodo as next Indonesian president.