Indonesia’s dash for growth may prove costly

FOR AN ECONOMY that’s often depicted as an ascendant power, decision-making in Indonesia has appeared remarkably haphazard lately. In an era when the dollar is very strong and emerging-market assets vulnerable, sudden lurches tend to be punished.

Since a financial collapse in the late 1990s almost dismembered the country, policymaking has been mostly steady and orthodox. Deficits have stayed within sensible legal limits and the currency has been allowed to fluctuate in response to broad developments. Monetary policy has been reasonably transparent and devoted to fighting inflation and keeping the rupiah stable. Consistency has been a hallmark of economics under a succession of Indonesian administrations.

Things have been less predictable since President Prabowo Subianto took office in October. The dash for faster growth that the new leader desires may prove costly if accompanied by a surplus of U-turns. Developments in fiscal policy and interest-rate setting have not been encouraging.    

The latest surprise was a drive to cut government spending by about 8.5%, announced late last month. On the face of it, this is a laudable goal: Markets are keenly attuned to anything resembling loose budgets. Brazil led emerging market-currencies, including the rupiah, lower around the turn of the year amid concerns about a fiscal blowout. But this mean that spending on infrastructure, long a demerit for Indonesia, will take a hit. Some key projects were completed during the administration of Prabowo’s predecessor, Joko Widodo, to his and the nation’s credit. (Travel, ceremonial events, and fund transfers to provincial areas will also be curbed under the new directive.)

What makes this step jarring is that the finance ministry had just gutted a long-planned increase in the . If Prabowo is so concerned about fiscal integrity, why the voluminous — and last-minute — raft of exemptions to the higher consumption levy? Tax hikes are rarely popular, but this had been in the works for a while. Technocrats look to have been defeated at the hands of political advisers.

Prabowo, a former top military commander, campaigned not as a hard man but as a populist. During the election, he spoke at length about significantly accelerating the country’s already respectable growth rate of around 5% to the . One of his key promises was free school lunches. During the eight-month gap between last February’s election and his swearing in on Oct. 20, Prabowo chafed at constraints on spending and expressed skepticism about laws that hemmed in budgets. Usually, the rupiah weakened in response, and his aides came out and hosed things down. The sudden shifts that have played out recently in Jakarta recall these on-again-off-again pronouncements.

Another January surprise came in efforts to shore up the rupiah. The government now plans to to keep their entire foreign-currency-denominated earnings onshore for at least a year. That’s much tougher than the existing obligation of 30%, but firms knew that stricter requirements were coming. Officials had signaled that more would be required, but a quarantine on all earnings hadn’t been on the radar. Expect the unexpected is the order of the day.

The new exporter rules came close on the heels of a shock decision by the central bank to lower its main rate and emphasize the need to bolster the expansion. “We have changed our stance, which is to pro-stability and growth,” Bank Indonesia Governor Perry Warjiyo on Jan. 15. Not one of the 38 economists surveyed by Bloomberg saw that coming. Nor should they, when the BI had been sending out a very strong message that steadying the rupiah was the priority. The currency lost about 6% in the fourth quarter and climbed above the eye-catching level of 17,000 per greenback. It’s down another 1% so far this year. It certainly looks like Indonesia is leaning toward faster growth, but the stability may prove more elusive. The central bank continued its intervention to support the rupiah in the aftermath of the rate upset.

Every now and then a monetary authority surprises: the Bank of Korea unexpectedly cut in November and the Bank of Japan pulled a nasty surprise in July when it hiked. But jolts are preferably rare. Usually, some effort is made to prepare the ground in advance or inject nuance into forecasts, even if not every trader reads the tea leaves. As a rule, the more exposed an economy is to swings in global capital flows, the more conservative it should be before branching out in new directions, especially when the existing course has served a country well.

Prabowo is dismissive of the 5% average growth achieved under Jokowi, as Widodo is popularly known. It’s fine to aspire to something more, but he should consider the context. Jokowi pressed for 7% and found that . How plausible, then, is 8%? Jokowi had ambitions for his nation, too, but critically left respected professionals to run policy. Prabowo scored a coup when Finance Minister Sri Mulyani Indrawati, who had served in the post since 2016, agreed to stay on. She must now sell zigzags to investors unused to, and disinclined to indulge, chaos.

This is a terrible time for policy to be fighting itself.

BLOOMBERG OPINION