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Cracks emerge in Yudhoyono's facade

Asia Times - June 13, 2012

Gary LaMoshi, Denpasar Indonesia has been running its own version of the China bargain. In exchange for economic growth, Indonesians have largely agreed to overlook the government's failure to deal with other pressing issues.

Now, with the prospect of slowing growth, President Susilo Bambang Yudhoyono's administration needs either to find new ways to boost the economy or show some long overdue leadership.

Last year, Indonesia's gross domestic product (GDP) rose 6.4%, the fastest since 1996, the year before the Asian financial crisis hit. Last year's fourth-quarter growth rate of 6.5% marked five straight quarters of economic growth above 6%.

The country won international kudos for producing such solid results in a shaky global economic climate, countering slowing exports to Western destinations with a rise in consumer spending, infrastructure spending and foreign investment.

The local currency, the rupiah, has advanced 1% against the US dollar after gaining 4.4% in 2010. Inflation fell to a controllable 3.8%. Credit agencies Moody's Investors Service and Fitch Ratings both recently raised Indonesia's debt to investment grade, which makes government borrowing cheaper.

Trade gap

This year, however, poses greater challenges as the slump in Europe seems more likely to spread than subside. First-quarter figures show Indonesia's growth continued at 6.3%.

At first glance, that's a good start toward the government's forecast of 6.5%, but it was the slowest growth figure registered since 2010, and so far the second-quarter has brought more troubling news. Inflation has climbed toward 4.5%. Exports in April fell 3.5% to US$15.6 billion, leading to a trade deficit of $641 million, Indonesia's first month in the red since June 2010.

The trade deficit is particularly ominous because foreign reserve outflows could add to pressure on the value of the rupiah, which on May 31 fell to its lowest since November 2009. The Indonesian currency is down more than 3% in 2012 and off 10% from its high in August last year.

Each 1% drop in the rupiah lifts inflation by up to 0.1%, according to economists. A falling rupiah also makes holding Indonesian equities and bonds less attractive to foreign investors. The Jakarta Stock Exchange's benchmark index is down nearly 10% during the past month.

President Yudhoyono's administration is trying to fight back. Last Friday, Finance Minister Agus Martowardojo said the government plans an economic stimulus package to boost domestic consumption. Consumer spending accounted for 55% of Indonesia's GDP last year, while exports made up 32%.

To keep wallets open, Martowardojo said the government will raise the threshold on taxable income by almost two-thirds, to 24 million rupiahs (US$2,553). That's a first step to encourage more household spending; or it would be, if another government agency wasn't working simultaneously to counter its impact.

At nearly the same time as Martowardojo announced the stimulus plan, the country's central bank said it will go ahead with its plans to restrict credit and thus reduce consumption. Bank Indonesia's new credit rules, which take effect next week, require a minimum 30% down payment for property mortgages and private cars, 25% for motorcycles, and 20% for commercial vehicles.

Those down payment rates are approximately double prevailing norms. Industry officials suggest that under the new rules, sales of cars and motorcycles will fall short of forecasts by more than 10%, tumbling below 2011 figures.

Similarly, Martowardojo said the stimulus program would also include incentives for investment through accelerated infrastructure financing. The government, however, has not established the required regulations to actually spend more on infrastructure faster.

It is difficult to determine whether Yudhoyono and his administration are the villains or the victims in this round of policy incoherence. But it has arguably become the unfortunate norm during his second-term government.

Ducking the mandate

On many fronts, Yudhoyono has squandered the overwhelming electoral mandate for reform he won three years ago. Rather than acting boldly to press for the changes his supporters sought, Yudhoyono has gone out of his way to compromise, in effect asking the opposition to run the government, and to duck the big issues.

Some argue that Indonesia has just run into an overdue sour patch after a couple of years of nothing but sweet spots. But the current troubles highlight how hollow Indonesia's economic boom has been, and how little its leaders have done to build on it.

In exports, for instance, shipments have focused on the low-hanging fruit of natural resources, leveraging into a global commodity price upswing. In value terms, nearly all of Indonesia's exports are non-renewable resources, including coal, petroleum products and precious metals.

Investors, however, tend to take Indonesia's commodities and run to process them elsewhere. Even the rock from the Freeport-McMoRan's giant Grasberg mine in West Papua is sent to Singapore for processing.

Despite its labor-cost advantages over China and Vietnam, a large relatively open domestic market, and duty-free access to the rest of Southeast Asia and China through Association of Southeast Asian Nations (ASEAN) trade pacts, Indonesia has been unable to attract significant manufacturing investment.

Manufacturers that have tried Indonesia as an alternative to China often complain that its logistics are inferior due to poor infrastructure. China's government has poured comparative billions into roads, ports and other big-ticket projects.

Only now, with its newly won investment grade credit rating, can Indonesia borrow the funds to undertake similar infrastructure improvements. At the same time, the country still has a difficult time attracting non-portfolio investment. That is mainly because the government hasn't tackled the big issues facing the country, most notably corruption and a dysfunctional judicial system. Nobody wants to invest in a factory or bridge built on legal quicksand.

Foreigners are rightfully leery of a system where tycoons play by a different set of rules, and Indonesians who are successful are more interested in getting their money out of the country into a Singapore condo, for example than investing at home.

To its credit, Yudhoyono and his team have tried to fight corruption. They've supported the surprisingly effective Corruption Eradication Commission (KPK by its Indonesian acronym).

But convictions and jail terms always seem to stop with the little guys, tax officials like Gayus Tambunan, rather than following the chain to the big businesses that Tambunan alleges paid him off to fix their taxes. You can see the glass as half-empty or half-full, but at least there is a glass.

What you won't see is Yudhoyono getting out in front on any issue. He has consistently let hot-button issues percolate and generally adopts a consensus position with the backing of allies. He often lets others do the talking for him.

That leads many observers to believe that Yudhoyono doesn't really know what he wants, doesn't really care, or doesn't really mean what he says, and thus his pronouncements are often ignored.

No way to treat a lady

The recent cancelation of a concert by American singer and songrwriter Lady Gaga would be a comic footnote if it didn't perfectly illustrate how Yudhoyono's weak leadership hurts Indonesia, domestically and internationally.

Last month, a sell-out crowd of 52,000 paid from US$50 to more than $200 to see Lady Gaga perform at Jakarta's Bung Karno Stadium. But hardline Muslim groups, including the Islamic Defenders Front (FPI) that specializes in mob violence, threatened to attack the airport when the pop diva arrived and to disrupt the show.

The police, notoriously reluctant to stand up to Islamist and other religious extremists without explicit instructions from politicians, balked at issuing permits for the concert. When no one in government or the mainstream religious establishment dared to stand up against the hardliners, promoters canceled the show.

"FPI is grateful that she has decided not to come. Indonesians will be protected from sin brought about by this Mother Monster, the destroyer of morals," FPI Jakarta chairman Habib Salim Alatas told a wire service. "Lady Gaga fans, stop complaining. Repent and stop worshipping the devil. Do you want your lives taken away by God as infidels?"

While Yudhoyono remained hunkered in his bunker, for good measure his government's Religious Affairs Minister Suryadharma Ali sided with FPI, saying, "I strongly believe this cancellation will benefit the country."

The opposite is more likely true. Foreign companies looking to invest in Indonesia will see that Yudhoyono's government lacks the fortitude to stand up to fringe groups with the same level of support and credibility as Florida's Koran burning pastor Terry Jones. Instead, Indonesian authorities will let extremists threaten violence against innocent people without consequence and scuttle a multi-million dollar international enterprise.

Lady Gaga had the last word when she said, "There's nothing holy about hatred." And, she probably knows, it's bad for business, too. As the economic squeeze tightens, perhaps Yudhoyono will realize he has to act decisively and get his government in line to promote economic growth. As the clock ticks down on his final two years in office, he may realize a healthy economy is the lone positive legacy he can hope to leave.

[Longtime editor of award-winning investor rights advocate eRaider.com, Gary LaMoshihas written for Slate and Salon.com, and works an adviser to Writing Camp (www.writingcamp.net). He first visited Indonesia in 1994 and has been watching ever since.]

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