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Economic nationalism endangers Indonesia

Economic ideas do not get much worse than Mr Prabowo Subianto’s plan to double the rate of Indonesia’s borrowing. The presidential contender wants to boost growth by increasing default risks and returning South-east Asia’s biggest economy to junk status.

Mr Prabowo Subianto during a televised debate in Jakarta on Sunday. The presidential candidate has suggested boosting the country’s growth by doubling the rate of its borrowing. 
Photo: AP

Mr Prabowo Subianto during a televised debate in Jakarta on Sunday. The presidential candidate has suggested boosting the country’s growth by doubling the rate of its borrowing.
Photo: AP

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Economic ideas do not get much worse than Mr Prabowo Subianto’s plan to double the rate of Indonesia’s borrowing. The presidential contender wants to boost growth by increasing default risks and returning South-east Asia’s biggest economy to junk status.

Why would a smart, former businessman with 41 per cent support even suggest such a retrograde policy? To me, it is emblematic of the bad economic ideas pervading Jakarta ahead of next month’s presidential election.

Front-runner Joko Widodo, for example, is turning protectionist as the race tightens. The Jakarta Governor’s aim to reduce red tape and corruption, as well as upgrade infrastructure, is great. However, his pledges to restrict foreign investment in Indonesian banks, review trade agreements and raise mining taxes will do more harm than good in a nation that direly needs more inward investment.

Mr Prabowo’s proposal is just plain dangerous. His argument that Indonesia is “underleveraged” suggests he does not understand that debt-market perceptions matter.

Sure, the nation’s debt-to-gross domestic product ratio seems relatively low at 24 per cent. Raising it towards 50 per cent, he reasons, is the best way to accelerate growth and curb poverty. This factoid should give him pause: Bond traders think Indonesia is 10 times more likely to default than Malaysia or the Philippines, though its liability ratio is half that of its South-east Asian peers.

 

WHAT THE NEW PRESIDENT SHOULD DO

 

The reason is the legacy of bad fiscal managers, including Mr Prabowo’s one-time father-in-law Suharto. Since 2004, incumbent President Susilo Bambang Yudhoyono has done a remarkable job cleaning up the national balance sheet, righting the economy and undoing the kleptocracy dictator Suharto built over 32 years until his ousting in 1998.

However, there is no guarantee of continuity, as Mr Prabowo’s debt-binge idea attests (Mr Prabowo himself is a controversial former lieutenant-general).

Mr Yudhoyono’s decade in office was not state-of-the-art. The President has done more coasting than reforming in his second term. His anti-graft push lost its oomph and he has failed to curb the tide of economic nationalism that seems to have carried away both candidates to replace him.

In a recent op-ed, economist Nouriel Roubini listed Jakarta among the governments “moving in a similar nationalist direction” when they should be addressing “major structural-reform challenges if they are to revive falling economic growth and, in the case of emerging markets, avoid a middle-income trap”.

The future is Indonesia’s to lose. The number of middle-class and affluent consumers has been forecast to nearly double to 141 million by 2020, from 74 million in 2012. That demographic dividend could become a nightmare if governments do not create enough jobs.

Indonesia’s next leader should accelerate Mr Yudhoyono’s good governance efforts, deregulate industry, welcome overseas investment to finance new ports, highways and power grids, as well as invest in education and healthcare.

Mr Prabowo wants to get growth back in the 10 per cent range from about 5.2 per cent today, Mr Hashim Djojohadikusumo, his brother and economic adviser, told Bloomberg. However, is borrowing US$300 billion (S$375 billion) from the capital markets over five years really the best way to do it?

Indonesia must create growth organically by opening the economy, empowering small-to-mid-size companies and attacking corruption — not by risking the wrath of bond traders and credit raters. BLOOMBERG

 

ABOUT THE AUTHOR:

William Pesek is a Bloomberg View columnist based in Tokyo who writes on economics, markets and politics throughout the Asia-Pacific region.

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