Indonesia: Now or Never

The biggest invisible thing on earth.

That’s how Indonesian businessman John Riady described the country after studying in America. Few of his worldly cohort at Georgetown University could locate the archipelago nation on a map. 

I sympathise with their ignorance, failing to appreciate its size until moving to Singapore. Several of its islands are just a few miles south of here and the territory stretches south-west to within 60 miles of Australia. Indonesia is a lot bigger than densely populated Java and its Bali tail. 

It’s the world’s 4th most populous country and the largest Islamic nation. That’s easy to miss on a visit to Hindu-majority Bali, most tourists’ sole experience of Indonesia. There are another 274 million people on the archipelago’s other 6,000 inhabited islands. 

Indonesia’s geography and history

This geographical complexity partly explains its invisibility. No other nation exists as such a sprawling island chain. But it has also avoided the tragedies that make neighbours Vietnam and Cambodia feature more prominently in western minds. 

Indonesia gained independence from the Dutch in 1945 and its modern history is dominated by General Suharto. His military dictatorship lasted 32 years. As a US ally and without the graphic domestic violence of something like the Killing Fields, his oppressive and corrupt regime escapes international attention. Suharto’s legacy is contested in Indonesia too where many still hold him in high regard. 

The 1997 Asian financial crisis eventually toppled him as promises of prosperity came undone. And it’s this lack of economic progress that also contributes to Indonesia’s obscurity. It lags far behind the tiger economies of South Korea, Taiwan, Hong Kong and Singapore. Regional rivals Thailand and Malaysia are much richer too.

modern indonesia

But Indonesia’s more recent democratic history is one of steady growth. While undershooting presidential targets of 7 percent, it has ticked along at 5 for most of this century. Perhaps more impressive is the stability of the transition from authoritarian rule. Indonesia is a rare functioning democracy in this corner of the world.   

A bullish narrative is growing around the country. Infrastructure is getting built. There are huge mineral riches. And its demographic dividend is peaking. 70 percent of the population is of working age. This sentiment is reflected in the Jakarta stock exchange’s composite index. It has risen by 45 percent over the 9-year rule of outgoing president Joko Widodo (or Jokowi as he is commonly known), outpacing the region.

2024 Indonesian elections

So last week’s election brought both hope and anxiety. Hope because the clear winner is continuity candidate Prabowo Subianto. Ordained by the wildly popular Jokowi, he will pursue a similar economic strategy as Indonesia seeks to beat the middle-income trap. Anxiety because of his tainted past. Subianto is Suharto’s son-in-law and implicated in the regime’s human right violations. His capricious and hot-headed nature also concerns investors. 

Subianto takes charge at a vital moment. Indonesia is ambitious. It targets high-income status by its 100th anniversary in 2045. But current growth rates won’t cut it. And time is running out. Its positive dependency ratio will start to turn by the next elections in 2029. Can Subianto turbocharge the economy and justify investors’ current hype?

the bullish case for indonesia

Indonesia has nickel and a strategy to piggyback on the green revolution. It has the world’s largest resources of the key metal for electric vehicle (EV) batteries. Rather than become a global wholesaler, Indonesia wants an EV ecosystem. Its policy of “downstreaming” restricts exports of the raw material and requires nickel to be refined domestically. Foreign manufacturers have to financially commit for access. 

Statistics show the strategy bearing fruit. Exports of nickel’s processed form ferronickel rose from $83m in 2014 to $5.8bn in 2022. The world’s largest EV manufacturer BYD announced plans last month to build a $1.3bn plant in the country, providing some consolation for the hitherto unsuccessful wooing of Tesla. 

Indonesia is simultaneously going all-out on infrastructure, earning Jokowi another nickname of builder-in-chief. Southeast Asia’s first high-speed rail, Whoosh, launched last September. It connects the country’s 2 largest cities, Jakarta and Bandung. And there are bolder plans beyond Java, where half the population lives. Subianto vows to continue the relocation of the capital city to Nusantara on Borneo. Billed as a futuristic city in the Neom ilk, proponents claim it will ease congestion in smoggy Jakarta and spread the country’s concentrated wealth.

Jokowi’s infrastructure spending makes the G20 look lethargic. He committed 5 to 7 percent annually against those developed nations’ 1 percent. State-run builders are running up big debts but it’s not fuelling an asset bubble like China’s property crisis. The urgency is necessary and many welcome the ambition. 

Source: Bloomberg

Promisingly, fiscal discipline remains part of the strategy. The law enshrines a maximum deficit of 3 percent of GDP. To accommodate further spending, Chatib Basri suggests Subianto will have to increase tax revenues. Indonesia’s tax to GDP ratio is very low and Basri believes boosting this is doable without tax hikes. He advocates for administrative reform and the closing down of loopholes. There is a precedent with Jokowi already clawing back $300bn in hidden assets through a tax amnesty.

the bearish case for indonesia

Sceptics argue the pitch is better than the results. Jon Emont of the Wall Street Journal gets why economists love Indonesia: a young population, a tourist paradise, fertile soil and enormous mineral reserves. 

But recent respectable growth rates hide missed opportunities. Indonesia has reaped little benefit as companies derisk from China. Recent examples include Nike picking Vietnam for trainers and Apple going to India for iPhones. Emont damningly states:  

Since the US-China trade war began, the share of manufacturing in the economies of southeast Asian countries like Cambodia, Vietnam and Malaysia has risen. In Indonesia, it has continued to sink

Red tape still presents a regulatory headache. Screening rules effectively levy 22 percent tariffs and other barriers impose up to 130 percent on computers, electronics and transport equipment. Incorporating a foreign-owned business remains fiendishly difficult. TikTok had to acquire a controlling stake in Indonesian tech unicorn Tokopedia to launch in the country. And despite going all in on EVs, Tesla chose Malaysia for its regional headquarters instead.  

The EV nickel gamble is itself precarious. Lithium-iron phosphate batteries are getting more prevalent, as are sodium-ion batteries. The Chinese carmaker JAC Motors delivered the first commercial vehicles powered by the latter to customers last month. Indonesia risks losing its big bargaining chip if these alternatives become increasingly viable.  

Finally, there is the political risk of a new leader. Markets were reassured by Subianto’s election. His vice-president, 36-year-old Gibran Rakabuming Raka, is Jokowi’s son. Jokowi’s brother-in-law in the constitutional court granted him an exemption from rules barring anyone under 40 running for high office. Putting allegations of nepotism and overreach aside, it inspires confidence that Jokowi’s influence continues. 

However, Subianto is a very different figure to his mild-mannered predecessor. His authoritarian streak is not necessarily an impediment to economic growth. All of the Asian Tigers had a healthy dose of strongman rule in rising to high-income status. South Korea and Taiwan only went democratic in the 1990s, Singapore retains a hybrid regime and Hong Kong transitioned from colonial administration to Chinese appendage.    

But few see Subianto as Indonesia’s Lee Kuan Yew. He is prone to shoot from the hip rather than a thoughtful and strategic moderniser. Lacking an ideology, his unpredictable outbursts worry investors valuing stability. At Singapore’s Shangri-La Dialogue summit last year, Subianto unveiled an impromptu and uncalled for peace plan to end the Russia-Ukraine conflict. It sparked only confusion rather than engagement. 

Indonesia and geopolitics

This highlights the precarious geopolitics confronting Indonesia. In The End of the Asian Century Michael Auslin argues that the Asian Tigers were beneficiaries of an unprecedented post-1945 peace dividend. 

The region has benefited from a unique historical moment, a decades-long stretch of general stability, combined with the explosive rise of the middle class and technological revolution.     

Indonesia faces a far more fragmented backdrop. Its biggest sources of foreign investment are China and the USA. That’s not unusual in the region but it takes sensitive diplomacy to navigate demands from these warring superpowers. Is Subianto the right man to do that? 

subianto determines indonesia’s future

His nation is finally in the spotlight. But that glare also now focuses on Indonesia’s challenges and shortcomings. The middle income trap is so-called because it is extremely difficult to wriggle free of. The Asian Tigers stand out because they are the only ones to do so. They benefited from circumstances as much as strategy. Indonesia hopes the green revolution is its ticket out. Delicate politics and simplified regulation need to accompany that plan if it is to leverage these circumstances. 

The next 5 years are pivotal as the country seeks riches before it gets old. Subianto’s presidency will determine whether Indonesia really is the next big thing or just its short moment in the sun.  

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