So far so good

Indonesia's economy and the election 

Jan 8th 2009 , The Economist | JAKARTA,  (From The Economist print edition) 

The president has quite a good crisis 

WITH only three months until parliamentary elections, Indonesia’s six-month-old campaign has moved up a gear. For once, thanks to the global economic slump, it as much about substance as about style and personalities. And, unlikely as it seemed six months ago, President Susilo Bambang Yudhoyono’s government can hold its head pretty high. 

The data suggest the fourth-quarter slowdown in Indonesia was much less pronounced than elsewhere in South-East Asia. Economic growth for 2008 as a whole is likely to exceed 6%. Many other indicators are also robust. The 2008 budget deficit was 0.1% of GDP and the government has earmarked $3.5 billion to spend on tax breaks and infrastructure projects. 

In late 2008 the currency, the rupiah, lost a fifth of its value against the dollar, but the slide has halted. The cost of insuring Indonesian government bonds against default has come down sharply. Inflation, still running at an annual rate of 11%, is falling, enabling the central bank this week to cut its benchmark interest rate by one-half of a percentage point, to 8.75%. 

Most banks are healthy, thanks to radical reform after the Asian crisis of a decade ago. And in 2008 the country achieved rice self-sufficiency for the first time in 24 years. Manufacturing is starting to feel the heat but only 25,000 workers have been laid off since November. And, according to research by the Asia Foundation, an American NGO, the huge informal sector has yet to feel much of an impact of the crisis. 

President Yudhoyono can certainly take some credit for all this. He courted unpopularity by raising the prices of government-subsidised fuel when oil was soaring last year, and has now been able to cut them twice. Measures have been taken to support the financial sector and the poorest in society, and his stimulus package will both offer tax incentives and finance additional infrastructure projects. Moody’s, a credit-rating agency, gave Indonesia a “stable” outlook in its annual report this week, expecting the authorities to manage the impact of the crisis competently. 

Factors that have nothing to do with the president’s policies are also helping. Domestic demand accounts for two-thirds of GDP, so though Indonesia remains vulnerable to sharp falls in the prices of commodities such as coal and palm oil, collapsing exports will not hit it as hard as its neighbours. The lack of infrastructure development in recent years means a few billion dollars will have a much greater impact than it might otherwise have done.

The government, however, needs to get the funds flowing fast and it is bad at disbursing money quickly. It also needs consumers to keep spending. Here the signs are ambiguous. Many Indonesians are not savers by nature. Yet carmakers, for example, are predicting a 25% contraction in sales. Food producers are less gloomy. 

However, Indonesia, which suffered worse than any of its neighbours in the crisis of the late 1990s, has not yet weathered this one. It is handicapped by the weakness of the rule of law, the poor investment climate, labour militancy and creeping protectionism. 

The elections pose another hazard: the extent to which government ministers are ready to put the country’s interests ahead of their parties’ electoral prospects is in doubt. And then there are the global unknowns that could wreak havoc. But Mr Yudhoyono is probably sleeping better these days than most of his regional counterparts; and better than he himself could have hoped just a few months back.

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