Trade War Threatens Hard-Won Stability of Southeast Asia's Giant

(Bloomberg Opinion) -- Even the most promising national economies can get big stuff within their control basically right and still be blindsided by events utterly beyond their control. Like, ahem, the trade conflict and market tumult.

That's certainly the case with Indonesia, a sprawling country of more than 260 million people tipped to have one of the biggest economies by mid-century. President Joko “Jokowi” Widodo's team and the technocrats at the central bank get kudos for stability, a word they love to deploy. Variations of it clutter the International Monetary Fund's annual report on the country published a few days ago.

Fair enough. Gross domestic product grew a smidge more than 5% in the second quarter from a year ago, the government said Monday, basically the average rate notched through Jokowi's first five-year term. Inflation is tamed at about 3%, safely within Bank Indonesia's target range. The country's bete noir, the current account deficit, was kept from breaching 3% of GDP last year.

Given Indonesia's wrenching experience during Asia's financial crisis in the 1990s – the political and social collapse of the 32-year Suharto regime worsened the economic upheaval – being boring has something going for it. Predictable if unspectacular growth and long overdue attention to infrastructure needs gave Jokowi a comfortable win in his bid for re-election in April.

But is steady and competent really enough? For a country that, a bit like Brazil, is always seen as the next big thing, one can't help but feel Indonesia ought to be doing better. The IMF is right that the broad economic settings and execution have been essentially sound, yet that only gets you so far.

Indonesia's biggest challenges lie beyond the shores of its 18,000 islands. Handled well, there's a potential template for managing a vast, ethnically and religiously diverse developing country. Mishandled, sectarian and regional tensions lurking just beneath the surface might get worse. The election and its run-up showed a growing challenge to pluralism as the world's most-populous Muslim nation increasingly turns to a more conservative, political Islam.

For a country that has barely touched monetary policy this year and isn't really part of any major supply chains, Indonesia has been buffeted by the twin market dramas of the past week: see-sawing perceptions of the Federal Reserve and the escalation of Donald Trump's trade war against China.

Bank Indonesia intervened in markets for the past several days to stem a sell-off in the nation's bonds and the rupiah. Global markets were roiled by mixed signals from the Fed about whether additional U.S. interest-rate cuts were envisaged and investors weighed how much damage might be inflicted by the U.S. step to impose additional tariffs on goods from China.

One irony is that Indonesia has no significant export manufacturing business, setting it aside from neighbors like Malaysia, Thailand and Vietnam that are coming out ahead on the trade war. But as I wrote in April, the distinctly nationalist flavor of Indonesian policy over the decades can't fully protect a country that nonetheless solicits foreign investment from shifts in finance and economics on a broader canvas.

Another contradiction of BI wading into the market is that Governor Perry Warjiyo's interest-rate cut a few weeks ago, the first in years, was almost grudging in manner. While he was open to more reductions, the bank's written commentary showed little enthusiasm for the task. No matter. Global capital flows had spoken and with international investors owning almost 40 percent of Indonesia's sovereign debt, BI doesn't have a lot of options. Red numbers on market screens at the bank's headquarters will make officials even more wary of additional cuts.

Sure, Indonesia can always do more. As the IMF noted, the government isn't taking in enough revenue despite improving its tax collection efforts. In other areas, it ought to do less. Jokowi has flagged that more natural resources should belong in the hands of the state rather than mining conglomerates. That needs to be done delicately.

Let's not be churlish. The country has come a long way since the scourge of instability, rather than the virtue of stability, characterized policy. Pity it isn't enough.

To contact the editor responsible for this story: Patrick McDowell at pmcdowell10@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.