Is Indonesia Set To Become An Economic Superpower?

Courtesy of The Financial Times, commentary on Indonesia’s economic prospects:

Indonesia’s President Joko Widodo is a man in a hurry. Accompanied by a vast retinue of cabinet ministers, his chef, and 100 chief executives he has travelled to the heart of Borneo’s rainforest to oversee his audacious plan to build a new capital there.

In 38-degree heat, Jokowi, as he is widely known, throws himself into a frenetic schedule of “groundbreaking” ceremonies in clearings in the jungle — for an airport, a school, two hospitals, a hotel and shopping mall, as well as the new headquarters of Indonesia’s central bank.

It is four years since he ratified his $32bn dream to move the government from the overcrowded and sinking megalopolis that is the current capital Jakarta to this equatorial outpost in Kalimantan. Even by the colossal standards of Asia’s infrastructure projects this has a staggering ambition and cost. Now, Widodo is racing against time to see it come into being before he steps down next year.

“This palace will be green, green, green,” he enthuses as he gives a tour of the half-built brass-clad presidential residence. In the shape of Indonesia’s mythical Garuda bird, it has outstretched wings and a commanding view of the capital Nusantara, which means archipelago in Indonesian. The palace-to-be is “51 per cent” complete ahead of next August’s deadline, he says, surveying a sea of bulldozers and cranes.

He brushes aside doubts that people may not want to move there; to get there from Jakarta requires a two-hour plane ride and then a bumpy two hours in a car. “They will come. Compare it to Jakarta where there are floods, pollution and traffic jams,” Widodo says. “The young, they will love it. It will be zero-carbon.” 

With that, he heads off to inspect a garden nursery stretching as far as the eye can see. Just two months old, it has 150 gardeners tending 4mn seedlings. “Soon we will have 16mn,” he says, reeling off a blizzard of data. “That means more or less 160,000 hectares we can turn green.”

To his critics, the president’s new capital is an expensive vanity project. He argues it is a chance to transform the economic geography of the country. In risk and ambition, it neatly echoes Indonesia’s own challenges and opportunities as the Widodo era ends.

The president’s departure next year after a decade in power comes as this giant democracy of 270mn people faces big questions over its trajectory. Widodo has stratospheric approval ratings, close to 80 per cent in recent polls, reflecting his steady record in handling the economy and an increasingly fraught geopolitical scene.

Since his first election victory in 2014, with the exception of the pandemic era, GDP has grown at about 5 per cent a year. As the relationship between Washington and Beijing has soured, he has steered a canny middle course. Bolstering his position has been Indonesia’s bedrock; it is the world’s largest producer of nickel, the coveted critical mineral underpinning new technologies such as electric vehicles and batteries.

So could this at last be a moment of lift-off, investors ask? Should Indonesia not be able to emulate other south-east Asian countries in growing at 7 per cent, enabling it to one day claim a place as one of the world’s top five economies?

“Indonesia’s combination of internal domestic market and natural resources is such that if we do get the human capital and education part right, I believe it will be hard for any country to compete with us,” says tech entrepreneur Nadiem Makarim, who is Widodo’s education minister. 

Or is Indonesia destined to disappoint economically as it has so often before? 

Widodo has delivered on promises such as infrastructure and trade, says Evan Laksmana, senior fellow at the International Institute for Strategic Studies (IISS) in Singapore. But, he adds, to attract more international investment the president needs to do more to take on vested interests in business and to reform the bureaucracy.

“A lot of experts and economists believe Indonesia could and should be growing at more than 5 per cent,” he says, but “I am not sure it can be a top five economy by 2045.”

Sidestepping US-China rivalry

If there are two words that have defined Widodo’s presidency they are infrastructure and nickel. When he took office, demand for Indonesia’s bountiful commodities had slackened against a global downturn, its infrastructure was underfunded and enthusiasm from international investors for the world’s third-largest democracy was weak.

The one-time city mayor set to work. Widodo points to the highways he has built, the airports that have sprung up in remote regions and the boom in new dams, seen as essential at a time when climate change has led to drought in large parts of the country. “Before, we had 240 dams, now we have 301,” he beams.

But it is his second term, starting in 2019, which has seen the most ambitious economic policies, in particular the creation of a domestic electric vehicle and battery supply chain. By banning the export of nickel ore in 2020, Widodo forced companies such as China’s Tsingshan, South Korea’s LG and Brazil’s Vale to set up more local factories if they wanted access to Indonesia’s abundant reserves. These factories were not only to refine nickel but also to entice more companies to build more of their supply chains in Indonesia.

Defying a ruling by the World Trade Organization that the ban was unfair, Widodo has stuck to his policy and it has paid off. Indonesia’s exports, boosted by soaring commodity prices, hit a high of $292bn in 2022 though they have moderated this year as China’s economy slows.

Yet for all his diplomacy, Widodo’s record on foreign direct investment is mixed. Indonesia has struggled to compete with Vietnam and India for the manufacturing shift away from China. International dollars have largely gone to the mining sector instead of high-tech manufacturing or other areas.

“Before politics Widodo managed factories. He keeps the costs down, the people happy and gets the product out. It’s not a bad approach and he is good at that, but it is not enough,” says Kevin O’Rourke, an analyst at consultancy Reformasi Information Services, adding that foreign investors need the reassurance of deeper reform.

Now geopolitical rivalry could yet stymie Widodo’s signature policy. Indonesia’s nickel is excluded from the US Inflation Reduction Act, the landmark green subsidies law introduced this year. The chief reason? China’s dominance of Indonesian nickel, from building most of the smelters to taking joint/majority stakes in mines.

Widodo met US President Joe Biden on Monday but failed to secure an exemption to secure access to US subsidies. Widodo’s delicate dance with America and China over nickel has played out at a time of intense geopolitical competition. When asked how Indonesia had managed to be “sometimes close to China and sometimes close to America”, he shot back: “Not sometimes. We do not side with either party. Both the US and China are friends of Indonesia. They are close partners.”

Indonesia is a stalwart of the old non-aligned movement, having set it in motion in 1955 in Bandung. So it came as a surprise in August when it turned down an invitation to join its would-be successor, the Brics. The grouping of Brazil, Russia, India, China and South Africa is busily expanding and sees itself as an advocate for the “Global South”.

Widodo’s decision gave rise to speculation that he had been wary of signing up to a “China club”, which might define itself in opposition to the west. Asked to explain his reasoning, Widodo says his answer had not been no but rather: “Not yet.”

“We don’t need to rush things when we have to make very careful calculations,” he says. “For me the key to a good relationship is trust.”

His latest tour of his new capital comes as the US and its allies face pressure to buttress their relationship with Indonesia and other big developing economies, where the west is lambasted as hypocritical for its full-throttle support of Ukraine and Israel.

Indonesia has the largest Muslim population in the world. In recent days vast crowds have demonstrated in Jakarta in outrage over Israel’s assault on Gaza, which followed Hamas’s October 7 attack.

“Indonesian people are very angry,” Widodo says, adding that he “of course” is too. As for speculation earlier in the year that Indonesia might follow Saudi Arabia in pursuing “normalisation” talks with Israel, he says it was never on the cards.

With his unadorned oratory it is easy to see how this furniture-maker-turned-president has charmed voters over the years. He is the ultimate outsider turned insider. Born in a slum in central Java, the most populous and prosperous of Indonesia’s 17,500 islands, he was the first president since independence not to come from the military and political elite.

But he proved a wilier politician than his straightforward persona might suggest and struck deals with other political parties as well as former foes to build a coalition. “He has earned the reputation of being a consummate political dealmaker and insider,” says Ben Bland, his biographer and director of the Asia-Pacific programme at Chatham House.

That he has managed to corral more than 100 chief executives to spend a day with him in the stultifying heat of Borneo testifies to the enduring power of his patronage in the closing months of his presidency.

It also testifies to the fallout of a controversial court decision that suggests the 62-year-old is not yet ready to take a step back and may be looking to retain influence in the years ahead.

Questions over corruption

In late October, the Constitutional Court, then headed by Widodo’s brother-in-law, Anwar Usman, issued a ruling that paved the way for the president’s elder son to stand for the vice presidency in February’s elections. The ruling was that a minimum age of 40 did not have to apply to all election candidates — a decision widely seen as an effort to allow the 36-year-old Gibran Rakabuming Raka to run for office.

In the ensuing furore, Usman had to step down as chief justice after an ethics panel found him guilty of a conflict of interest, but the court’s ruling stands. Gibran is now the running mate of the frontrunner in the opinion polls to succeed Widodo, the defence minister Prabowo Subianto. The former general — who twice ran against Widodo before joining his cabinet — has a cloud hanging over his reputation after he was dismissed from the military in 1998 over allegations of human rights violations.

When Widodo took office in 2014 he said “becoming president does not mean channelling power to my own children”. Asked how he squared that declaration with his son’s nomination, he says he had no hand in it. “Who elects the president? The people. Not me. Not my administration. Regarding my son’s candidacy, it was the collective decision taken by his supporters, party chairs, a coalition, not me.”

“I have full faith in this democracy,” he adds.

Indonesia’s democracy, which sprang back to life in 1998 after the downfall of the autocrat Suharto amid the turmoil of the emerging markets crisis, does indeed have a record of electoral upsets. But Widodo’s domestic critics argue he could have done more to shore it up, and that this risks undermining the push to turbocharge growth.

One of the most criticised moves of Widodo’s presidency was introducing a 2019 law regarded as weakening Indonesia’s respected anti-corruption agency. “He has been great on economy and other policies but not on democracy. Our old saying goes: ‘Nila setitik, rusak susu sebelanga’, a spot of dirt causes the whole cup of milk to spoil,” says Erry Riyana Hardjapamekas, a former commissioner on Indonesia’s Corruption Eradication Commission (KPK).

Widodo has less than a year to cement his legacy. After that, he says, he will return to his hometown of Solo and “continue my hobby in worshipping the environment because I am a forester”.

It is a charming vision but local businesspeople and politicians do not believe he intends to disappear. One scenario is a deal to take control of a political party — Prabowo’s Gerindra party is an option. They also do not see him walking away from Nusantara.

It has not been plain sailing. Not least as the project has failed to attract international investors as he had hoped. Only 20 per cent of the city is to be funded by the state budget, with the rest coming from public and private partnerships. Widodo says he is “not worried” that the state has taken up a large chunk of the burden. Claiming he wants to prioritise local investors, he says foreign investors are “put off” by the subdued global economy. 

Also, environmental groups are sceptical of the “green” messaging, highlighting that Indonesia has a poor record in reining in illegal logging and deforestation.

“It’s hard to have confidence that the new capital will deliver on all its environmental promises when we’re getting mixed messages from the Indonesian government in relation to deforestation on Borneo,” says Amanda Horowitz, a senior director at Mighty Earth. 

“While the new city takes shape on the east coast, on the other side of the island, we are witnessing the rampant destruction of peatlands and critical orangutan habitat.”

But for Widodo, who is tireless in reminding his audience of Jakarta’s problems, the project is a matter of survival. The gridlocked capital of 10mn people is one of the fastest-sinking cities in the world, according to the World Economic Forum; almost half of it sits below sea level. 

“Still people are asking me why we are moving,” he says. “The burden of Java and Jakarta is way beyond their capacity. There are 270mn people in Indonesia and 56 per cent live in Java and 58 per cent of the GDP is in Java, especially Jakarta.

“Making a successful new capital is hard,” he says, adding he has sent advisers to visit “new” capitals, from Canberra in Australia to Naypyidaw in Myanmar, for lessons on what and what not to do. Among them is Ridwan Kamil, governor of West Java, the largest province of Indonesia, who says Widodo’s biggest challenge is “time”. 

“I advised the president to be reasonable and that he only has one year. It has to be incremental. It took Washington DC 100 years to become what it is today,” Ridwan says.

That is the kind of sweeping analogy Widodo appreciates. The test now though is whether under his successors Nusantara can defy the sceptics and watch over the rise of a new global power — or whether it ends up as a semi-abandoned multibillion-dollar white elephant, slowly decaying in the jungle.

This entry was posted on Sunday, November 19th, 2023 at 7:13 pm and is filed under Indonesia.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

Comments are closed.

Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.