Home' Trinidad and Tobago Guardian : August 29th 2013 Contents BG28 | THE ECONOMIST
BUSINESS GUARDIAN www.guardian.co.tt AUGUST 2013 • WEEK FIVE
How quickly the mood can turn. Barely
a year ago, Indonesia was the toast of
emerging-market investors. The coun-
try reveled in the world s demand for
its vast reserves of coal, oil and other
resources, and celebrated with a consumer boom:
Economic growth clipped along at over six per cent.
Politics was stable, macroeconomic policy sound.
Foreign investors were scrambling to get into a market
of 240 million people and apparently boundless
Today things look different. Investors are spooked
by economic concerns. Growth is slowing, even as
inflation heads up. In the second quarter gross domes-
tic product growth slowed to 5.8 per cent, and it will
certainly undershoot the government s target of 6.3
per cent for the year. Inflation, meanwhile, rose to
8.6 percent in July.
Financial markets have taken a battering. After
falling by 7.7 per cent over three days, the benchmark
stock market index is down by a fifth from its record
high in May. The rupiah, a dismal regional performer
of late, is at its lowest level against the dollar in four
years. Foreigners have sold US$1.4 billion of govern-
ment bonds since June.
After a good run, many Indonesians have been
caught out by the sudden turn. Yet bewilderment
has not turned to panic. Some think that Indonesia
is merely being caught in a more general sell-off of
Asian shares and currencies, prompted by fears that
America s Federal Reserve will soon end its policy of
Economists also argue that much of the recent
bad news about the economy is just temporary. For
instance, inflation has jumped mainly because the
recent removal of fuel subsidies led to a rise in the
cost of gas. Inflation, they say, should soon fall back
to five per cent.
Nonetheless, Indonesia is being hit as hard as any-
where in Asia. For all that this week s sell-off reflected
concerns about the Fed s ending of quantitative easing,
it was also a reaction to a deteriorating current account.
After 14 years of surplus, the current-account balance
swung to a deficit of 2.7 per cent of GDP in 2012.
In the latest three months of data, the gap widened
to 4.4 per cent of GDP, it was announced on August
16. And this is only one symptom of wider structural
problems that the country failed to tackle when it
was enjoying an economic tailwind.
The government of President Susilo Bambang Yud-
hoyono, who is serving his second term, had promised
to grapple with the problems of Indonesia s awful
infrastructure, foot-dragging bureaucrats and rampant
corruption. Yet even by Yudhoyono s admission, it
has failed to do so.
Scandals have multiplied. The latest is at the nation s
oil-and-gas regulator. When the going was good,
such negligence seemed not to matter. Now, with a
fall in commodity prices and the prospect of an end
to cheap money, Indonesia s failure to revamp its
economy is laid bare. Investors have little confidence
that the country can find new sources of growth.
Even before this week s financial jitters, Indonesia
had slid down various rankings of investor confi-
Also spooking investors is a recent increase in eco-
nomic nationalism intended to disadvantage foreigners.
In the substantial mining industry, the government
for some years has insisted that foreign companies
refine or process in Indonesia the minerals, such as
copper, that they extract, rather than simply shipping
ores and concentrates abroad. This stipu-
lation was made in the hope of creating
more Indonesian jobs and investment.
Yet such laws have also come with heavy
restrictions on the share of local businesses
that foreigners may own. The trend is also
apparent in plenty of other industries,
including banking, where until not long ago
Indonesia ran one of the most open regimes
in the world. Now, regulations stipulate that
new investors may not initially buy more
than 40 per cent of a local bank. With par-
liamentary and presidential elections next
year, policies are likely to get even more
restrictive as politicians appeal to voters
nationalism by bashing foreign capital. As
one parliamentarian from the ruling party,
Ramadhan Pohan, sums it up, "neoliberalism
is a stigma and when you support this, you
In good times, Indonesia might have been
able to afford the luxury of such posturing.
But those times, all of a sudden, are over.
Now that profit margins are coming under
pressure---for example, from the govern-
ment s requirement that miners build local
smelters ---many foreign investors will begin
to look elsewhere, just at the moment when
Indonesia might need them most.
@2013 Economist Newspaper Ltd.
(Distributed by the New York Times
Indonesia's declining economy
Investors are spooked by
Growth is slowing,
even as inflation heads up.
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