Although the election of Joko Widodo as president of Indonesia is good news, because of the obstructive power of various forces, it would be wise for investors to assume he will only be able to make limited progress in addressing major problems hampering economic growth.
This giant nation has failed to capitalize on globalization because its protectionist policies and poor infrastructure have discouraged the development of world-class manufacturing seen in other Asian nations. Its automotive assembly plants, for example, depend on imported components for 70 per cent of vehicle content.
Indonesia is still far too dependent on producing commodities, with fossil fuels and palm oil accounting for 40 per cent of export earnings. A policy of restricting mineral exports aimed at forcing mining companies to invest in local processing is hurting foreign trade. The current account is now running in deficit, equivalent to 4 per cent of GDP.
The incoming president wants to phase out huge fuel subsidies over three years to save some $50 billion, but that’s going to be very difficult because they are so popular with consumers.
copyright: Martin Spring of OnTarget