Jokowi’s Indonesia: A new sheriff in town

Indonesia is closing the books on 2014 facing significant economic headwinds but also experiencing some genuine optimism that freshly-elected President Joko Widodo (Jokowi) is making real progress safeguarding the budget, pushing administrative reforms badly needed to boost growth and reduce corruption and even consolidating his position in the badly-fragmented national legislature.

From the November fuel price hike to bring the budget back under control and his aggressive policy of sinking foreign fishing boats operating illegally in Indonesian waters, to his frontal attack on the state’s notoriously corrupt oil and gas sector, Jokowi has shown the political will to use executive powers in an unprecedented fashion to address some of the most contentious economic and governance issues facing the nation.

Shortly after his inauguration, Jokowi launched his signature social safety net initiative – Indonesia Smart Cards (holders get free school books), Indonesia Health Cards (holders get free medical treatment) and Prosperous Family Cards (holders get certain cash payments). These were typically bold moves that demonstrated Jokowi’s results-oriented approach to governing. They also helped ease the way for the coming fuel price hike by showing the government was clearly committed to mitigating the impact of price hikes and inflation on low-income groups.

All this comes less than three months into his presidency and is in stark contrast to the style of his cautious predecessor, Susilo Bambang Yudhoyono, whose risk-averse, consensus-oriented administration had the default effect of enabling the entrenched political elite to consolidate its grip over patronage, projects and approvals.

As Jokowi exercises his administrative authority to make changes, the opposition-led legislature (DPR) seems to have lost its way. Since the fall of the Soeharto New Order regime in 1998 and the dawn of Indonesia’s new democratic era, old-line party bosses have dominated the legislature and turned it into a vehicle to perpetuate elite interests and reverse the modestly liberal economic reforms of 1998-2003 post-crisis period that enabled Indonesia’s strong recovery from its economic collapse in 1998.

Now this elite unity seems to be splintering in the face of an economic slowdown and the arrival of a new breed of political outsiders – epitomized by the president himself – intent making politics and governance more open, transparent and fair.

Where things stand

Although Indonesia’s new government has been in office barely two months as this is being written, some clear trends are emerging and it is not too soon look at some of the actions already taken as harbingers of things to come.

After surviving a tense court challenge in August that followed his party’s unexpectedly poor showing in the April parliamentary election and a narrow, hard-fought win over a tenacious rival in July’s presidential contest, Indonesia’s second directly-elected president, Joko Widodo, known to all as “Jokowi”, was finally inaugurated on October 20th.

Indeed, the drama that surrounded the entire electoral process has so dominated the political consciousness of the nation for the past eight months it is easy to forget that Jokowi has been in office such a short time.

While his performance has been far from flawless and much remains to be done, the new president has shown a sense of purpose, integrity and commitment to reform that is unprecedented in Indonesian political history. He has hit the ground running and has already altered the political landscape for the better.

Most of the decisions Jokowi has taken so far have been deliberate and thoughtful but, at the same time, clear and unambiguous – a marked departure from the endless dithering and drama that came to characterize the later years of his politically hapless predecessor.

If he can remain steadfast and overcome the vast array of vested interests of an entrenched elite and the corrosive elements in the country’s undisciplined bureaucracy arrayed against him, Jokowi may well become one of the first transformative leaders of the 21st century.

A quick look at several key areas will demonstrate the new Jokowi style.

Fuel Subsidies

The President’s 17 November decision to increase the price of subsidized fuel was quick, clear and decisive. It amounts to an immediate fulfillment of his campaign promise to reduce the country’s devastating subsidy bill and free up at least of some of the $25 billion dollars burned up each year on fuel subsidies for other purposes like health, education and infrastructure.

It has been clear for a decade that Indonesia’s cherished fuel subsidy regime has been a major drain on the national budget. In the past decade various subsidies have ballooned to over 20% of the national budget, dwarfing the amounts spent on education and healthcare combined.

His decision to raise gas prices 31% including steps to move towards a fixed-subsidy regime and adjustable pricing was a bold maneuver given the lack of parliamentary support and plummeting global oil prices. The limited public backlash despite the usual dire predictions of unrest from political opponents showed the president was right with a game-changing decision that has fundamentally improved at a stroke both Indonesia’s immediate and long-term economic prospects.

The price hike will cut over $8 billion dollars from the fuel subsidy. The president’s plan earmarks about $500 million dollars of this savings for a cash transfer to 15.6 million of the country’s poorest over the next two months, to help cushion the impact. The balance of the savings will go to infrastructure investment, education, health care and other social safety net programs although the amounts have not yet been specified.

At the same time, the fuel price hike was coordinated with Indonesia’s central bank, Bank Indonesia (BI), which immediately raised interest rates 25 basis points to 7.75% to help forestall the inevitable inflationary affects of the fuel price hike along with several other technical changes designed to preserve liquidity to support investment.

Despite some public grumbling from his vice-president, Jusuf Kalla, concerned about the negative impact of higher interest rates on investment, Jokowi signaled his approval by attending the annual Bank Indonesia year-end dinner where the BI Governor tries to set the tone for commercial finance for the coming year. It is unusual for the president to attend this gathering. Jokowi’s presence showed that the administration and the central bank were on the same page, adopting a hawkish approach to contain the country’s rising inflation, large current account deficit and weakening currency.

The Energy Sector

The energy sector has long been a source of significant corruption, favoritism and leakage. A major scandal involving the government’s procurement of oil erupted late last year. The investigation is still ongoing, but a one key official, Rudi Rubiandini, has already been jailed and more are likely to follow.

Taking advantage of the tailwinds from the current investigation, Jokowi’s measures to overhaul the energy sector with major changes to the energy ministry’s top echelons have been bold and decisive, clearly showing his determination to confront Indonesia’s so-called oil and gas mafia.

He started with the appointment of Sudirman Said as energy minister. Said has solid anti-corruption credentials as co-founder of the Indonesian Transparency Society (MTI) with former KPK director Eri Riyana Hardja Pamengkas. He also served as a key deputy at the very successful post-tsunami Aceh Reconstruction Agency under Kuntoro Mangkusubroto, one of Indonesia’s most highly respected good governance reformers.

One of new minister Said’s first actions was to fire the incumbent director general due to the directorate’s poor record in processing project approvals. He has also set up a Committee for Oil and Gas Management Reform, headed by respect academic and good governance reformer, Faisal Basri.

At the same time Jokowi also named former KPK (Anti-Corruption Commission) deputy chairman Amien Sunaryadi to head the sector’s regulatory watchdog, SKK Migas (his predecessor, Rubiandini, is currently serving a 7-year term for graft). Jokowi has also ordered a revamp of state-owned energy giant Pertamina.

These changes have been widely praised by industry investors, many of whom report they are already feeling the impact of reforms with less red tape and a more responsive bureaucracy.

Foreign Affairs

While Jokowi’s focus is clearly on the domestic situation, his first trip abroad was a reasonable success despite some initial confusion. No sooner had the new president been sworn in than he was faced with command performances at three of the most important international meetings of any year for the Indonesia leadership – the APEC Summit in Beijing, the ASEAN and East Asian Summits in Naypyidaw and the G-20 meeting in Brisbane.

As a populist leader with a common touch and a totally domestic focus in his public life prior to ascending to the presidency, Jokowi faces a very steep learning curve on international matters.

While his initial instincts clearly made him more inclined to spend his first month in office at home (one of his own ministers publicly suggested he skip the G-20), he quickly realized these meetings were too important to Indonesia’s national interests and his own international standing to be given less than his full attention. It was a wise decision and he performed well.

Although he surely benefitted from a charming naïveté that may begin to grate as his term grinds on, his performances were well received at home. Indeed, even his most skeptical audience, the critical Jakarta elite that feels threatened by this outsider who does not know them and owes them nothing, generally pronounced it a success.

One business leader, Kadin (Indonesia Chamber of Commerce and Industry) chairman Suryo Sulisto, was particularly effusive in his praise of Jokowi’s APEC performance in his public remarks at two international business conferences in Jakarta shortly after he returned from the APEC summit.

Sulisto said that Jokowi represented Indonesia very well with clear, brief statements welcoming foreign investment that were well received by his fellow leaders. While Jokowi enunciated the protectionist themes that are firmly imbedded in his own party’s DNA at the subsequent ASEAN and East Asian Summit meetings in Myanmar, even that played well among his Jakarta critics.

Later at Kadin’s Annual Working meeting, Sulisto said, “I’m not just being polite. In forty years of doing business, this is the first time I’ve seen [an Indonesian] government that is pro business. Very pro business”.

Sulisto’s comments carry even more weight as he is a lifelong friend and business colleague of Jokowi rival, Aburizal Bakrie. Sulisto’s public support of Jokowi puts him at odds with Bakrie who is now battling for his own political survival as the chairman of the incumbent Golkar faction that is being challenged by a rebel group intent on making peace with the administration.

Jokowi’s final international stop at the G-20 in Brisbane got a more muted response at home. While little headline grabbing progress was made on some of the more contentious issues facing Australia and Indonesia like people smuggling and trade, Jokowi and Australian Prime Minister Tony Abbott hit it off well. This should facilitate later discussions. While Jokowi consistently hammers that “all trade deals must benefit Indonesia” his early pragmatism gives cause for optimism that progress can be made on key bilateral issues like the livestock trade and maritime security.

So while there was some grumbling in the diplomatic corps that Jokowi had yet to appoint a spokesperson or an appointments secretary making the ordinary business of diplomacy more than usually challenging, the president definitely won points at home with his first appearances on the global stage. Indeed having his photo with Chinese President Xi Jinping smiling on one side and American President Barack Obama on the other splashed across the national media certainly did him no harm with the average voter.

Challenges Ahead

While the country can breathe a deep sigh of relief that the confrontation and acrimonious stalemate promised by the opposition majority following its candidate’s narrow defeat has crumbled in the face of Jokowi’s skillful reactions and the opposition’s many internal conflicts, the road ahead is far from smooth.

The most immediate challenge will be fiscal and monetary difficulties posed by Indonesia’s stubborn current account deficit (roughly 3% of GDP), devastated commodity earnings and weakening currency. While the country’s 5% GDP growth rate is certainly high by global standards, it has been in slow, steady decline since it peaked at 6.8% in 2010. This year, the growth rate has declined in every quarter. It has risen only once in the last 13 quarters.

In its latest quarterly report (December) the World Bank’s baseline scenario has GDP growth at 5.1% this year and 5.2% in 2015. With luck and rapid success in mobilizing some infrastructure funding, we think growth could be a bit higher, but government income is constrained by declining commodity revenue and a very poor tax revenue to GDP ratio (12%). Meanwhile, private sector liquidity is tightly constrained. While a more realistic attitude towards the needs foreign investors and the role of the private sector in public-private partnerships can help reverse the foreign investment slowdown, current global economic conditions and overall emerging market uncertainties indicate that improvement will only come gradually.

And, while chaos in the legislature has allowed the government to act rapidly without interference, a good working relationship with a functioning legislature is essential to the government’s ultimate success. The sooner this can be achieved, the better for all. The first real test will come next month when the government will submit its revised budget reflecting among other things, the weaker rupiah and the redistribution of the funds saved by reducing the fuel subsidy.

The new sheriff is here and he’s got a good start on cleaning up the saloon, but changing the bad behavior of decades will require relentless fortitude, the ability to keep his own cabinet team onside and persuade a skeptical elite that the new way is the better way.

James Castle is the President of Castle Asia and a member of the AIC Board.

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