Commentary: Chaos is taking a sabbatical in Indonesia

CNA

7 days ago

SINGAPORE: Bad news can be good for Indonesia. A slowdown in economic growth and the prospective hit from US tariffs may be imposing some discipline on President Prabowo Subianto's government. It's a welcome change.
The former general is only seven months into his term and some of the toughest decisions probably still lie ahead. Nonetheless, the sense of chaos that characterised the very start of the administration has abated.
Markets approve the return of normalcy: The rupiah has gained this quarter after disappointing last year, and a recent bond auction was well received. Offshore investors are warming to the nation's stock market after seven months of outflows.
The central bank felt comfortable enough to lower interest rates last week and signal further easing to come, in a decision that was forecast by most economists. So why the big deal? Bank Indonesia had been hard to read in the closing months of 2024 and the start of this year, when officials oscillated between shoring up the rupiah and stoking growth.
Holding on to predictability might not sound exciting, but it's the way monetary affairs are supposed to work. The shift is refreshing. Former Bank of England governor Mervyn King once remarked that the ideal condition is one of boredom.
HITS TO THE ECONOMY
While many economies will be hurt by the tariffs imposed by President Donald Trump, the 32 per cent so-called reciprocal levy handed down on the country is among the highest in the region. Duties have been reduced to 10 per cent for a few months to allow for a deal.
Indonesia is hopeful for an accord but can't count on it. The upside is that disenchantment with American trade policy, and the ham-handed way it has been implemented, has pushed the dollar down against most peers. This has helped boost currencies like the rupiah that were decidedly wobbly last year. It's a silver lining to a poor US approach.
The second fright is domestic in origin. Central to Prabowo's campaign was a pledge to accelerate the pace of growth from the average of about 5 per cent recorded by his predecessor, Joko Widodo, to around 8 per cent.
That was always going to take some doing; no economy of any consequence is expanding at that clip. First quarter figures, however, showed an unexpected slowdown. The main culprit was a sharp drop in state spending and investment.
Household consumption was also lackluster. This wasn't the way it was supposed to work. Prabowo had talked about using the government purse to lift the country's performance, not diminish it.
CHAOS AS A DEFINING FEATURE
The president has been a victim of his own rhetoric and populist impulses. The new year didn't begin auspiciously. A long-planned increase in a value-added tax was gutted at the last minute. Markets reacted poorly.
The perception was that the nuts and bolts of economic policy, previously left largely to technocrats, was being hijacked by Prabowo. Speculation grew that the respected finance minister, Sri Mulyani Indrawati, would soon depart.
The tax U-turn was then followed by a drive for savings that became almost comedic. Spending by ministries, agencies and local authorities was frozen; some offices switched off lights and suspended the use of elevators to save electricity.
The president attacked some civil servants as 'little kings' intent on stymying his agenda. If he cared so much about fiscal probity, wouldn't it have been better to let the broad VAT hike proceed?
The government looked like it didn't know what it was doing. Instead of emphasising stability, a hallmark of Indonesian economic policy in the decades since the Asian financial crisis, chaos looked like it would become the defining feature.
A MOMENT OF CALM
That's a dangerous development for a country with a current account deficit dependent on capital pouring in to maintain the rupiah's value. That things seemed to have settled down is a blessing. Markets in Jakarta no longer gyrate on speculation about cabinet shake-ups. Meanwhile, Trump's assault on governing norms makes Prabowo's early reversals look minor.
Indonesia isn't necessarily out of the woods. The president hasn't walked away from the general idea that a muscular fiscal policy is desirable. Spending on his signature initiative, the provision of free school lunches across the vast archipelago, will probably show up in second-quarter growth figures.
And in the event that Trump is able to secure a string of trade deals and the dollar rallies, the rupiah could again buckle.
For now, though, let's cautiously celebrate that chaos has taken a sabbatical. The relative stability hasn't come through ideal circumstances, though that it has happened matters. We have had a glimpse of what can happen when Indonesia gets out of its own way.