Almost a decade later, US interest rates are rising sharply, adding to the economic woes in the developing world. But Indonesia appears undeterred. At a time when the global economy is reeling from the Ukraine war and the global energy, food and climate crises, Indonesia has emerged as an unlikely outlier while maintaining a booming economy and period of political stability. Gross domestic product rose 5.4% year-on-year in the second quarter, well above forecasts. The country’s inflation of 4.7% in August, before the recent petrol subsidy cut, is one of the lowest in the world. Its currency, the rupee, is among the best performers in Asia this year and its stock market is hitting record highs. The resource-rich archipelago, Southeast Asia’s largest country with 276 million people, is riding high on rising commodity prices. Exports rose 30.2 percent year-on-year to $27.9 billion last month, the biggest on record. The world’s largest producer of nickel, a critical component in electric vehicle batteries, Indonesia is implementing plans to capitalize on the coming electric vehicle boom. Much of the credit for this boom has gone to Indonesian President Joko Widodo, who has managed to maintain his popularity with both ordinary Indonesians and investors after eight years in power. A poll released this week by research firm Indikator Politik Indonesia showed 62.6 percent of Indonesians approved of the charismatic former furniture dealer’s performance, down about 10 percentage points from before the fuel subsidy cut, but still leaving him as one of the most popular in the world. democratic leaders. Support for Widodo, who is known as “Jokowi”, is so strong that at one point his supporters were pushing to change the constitution to allow him to seek a third term in power. Widodo will have a chance to showcase this prosperity to the world when he hosts the Group of 20 summit in Bali in November. He plans to use the event to attract interest from global investors, including his most ambitious and controversial plan – a more than $30 billion proposal to move Indonesia’s capital from Jakarta to the jungle-clad island of Borneo, a project that would he could still decide his inheritance. “What we want to build is [a] future smart city based on forest and nature,” the president tells the Financial Times over a lunch of spicy soup and Japanese barbecue at the presidential palace in Jakarta, his face lighting up at the mention of the new capital. “This will show the transformation of Indonesia.” But even as investors flock to see the new Indonesia, some worry about the sustainability of its stability. Next year, the campaign for the 2024 election begins and Widodo still does not have an anointed candidate to continue his agenda. Critics also say he could have done more to further embed Indonesia’s new democratic institutions, leaving it vulnerable if a more aggressive leader comes to power in the future. “So many emerging markets have problems, Indonesia doesn’t at the moment. The economy is firing on all cylinders,” says Kevin O’Rourke, a Jakarta-based analyst on Indonesia’s politics and economy and director at consultancy Reformasi Information Services. “The problem is politics. We are 18 months away from election day and this could present a stark contrast to Indonesia’s long-term prospects. It could be good after 2024 or it could be very bad.”
The political underdog is coming along well
Widodo, who will host world leaders at the G20 summit, is almost unrecognizable from the humble former mayor of Solo, Central Java, where he began his political career 17 years ago. Although he retains some of his old hobbies, such as listening to heavy metal and driving motorbikes, he has emerged as a shrewd political tactician at the national level. A political outsider, Widodo has favored “big tent” coalitions, bringing friends and foes into his cabinet. George Yeo, Singapore’s former foreign minister, calls it a “Javanese democracy”. “I mean: ‘We’re going to campaign like hell, we’re going to call each other names, but when the ballots are counted and we all know what the ratios are, we’re going to form a cabinet. . . and you will get your share.” This, he argues, has led to Indonesia’s current stability. One example is Prabowo Subianto Djojohadikusumo, a controversial former general who ran a bitter campaign against Widodo in 2018 but is now defense minister. Prabowo Subianto Djojohadikusumo, a controversial former general who ran a bitter campaign against Widodo in 2018, is now defense minister © Willy Kurniawan/Reuters Investors say this political stability has helped the economy. With inflation relatively low, Indonesia’s central bank only raised interest rates for the first time in three years in August to 3.75%. Banks are also still lending and exports are booming, not just of goods. Widodo’s signature “crowd law” that relaxed employment regulations to help create jobs has encouraged more foreign investment as some producers diversify manufacturing away from China. “You can see what Indonesia is exporting now, broadly speaking. You name it, textiles, clothing, footwear, machinery, furniture, electronics, automobiles. . . things that create good jobs and incomes. This was the second year of double-digit growth, year-over-year,” said Reformasi’s O’Rourke, referring to Indonesia’s export gains in recent months. Economists warn that Indonesia’s main commodity exports, such as coal and palm oil, still play a “large role” in driving growth. Commodity prices could start to lose steam this year as Western economies slow, says David Sumual, chief economist at Bank Central Asia in Jakarta. “Next year will be a big challenge,” he said. “That’s why I downgraded my GDP forecast below 5 percent.” Inflation, which has been suppressed by fuel subsidies, could also rise quickly to 8% by October, according to Priyanka Kishore, chief economist for Southeast Asia and India at Oxford Economics. “The central bank has jumped into the global hiking cycle later, it may have to do a bit more, faster, to tackle inflation now,” he says. Indonesia has introduced restrictions on some commodities, including taxes on carbon and nickel, which have roiled markets. However, they have also helped develop the domestic manufacturing and refining sectors. “The headline is clearly that things are going well,” says Eugene Galbraith, a director at mobile tower company PT Protelindo and a long-time observer of Indonesia’s business. “All of those things, both good and bad policy decisions, add up to a widely popular and highly regarded president.”
Advantage in physical goods
One of Widodo’s main achievements was the expansion of infrastructure on an unprecedented scale for Indonesia, a vast country of 17,000 islands. His governments built 2,042 kilometers of toll roads in eight years, he said, compared with about 780 kilometers in the previous 40 years, as well as 16 airports, 18 ports and 38 new dams. Costs have skyrocketed on signature projects like the Jakarta-Bandung high-speed railway — China’s first overseas high-speed rail project — while others have been poorly designed, with a few shiny new airports in far-flung locations with no travelers. But the makeover is clearly visible, even to outsiders. The construction of an elevated track for the Jakarta-Bandung high-speed railway in Cikarang, West Java, last month © Dimas Ardian/Bloomberg “I was waiting for a change. But I did not expect such a change. Yes, there were traffic jams but not as bad as before,” says former Singapore minister Yeo on a recent visit to Indonesia. “Jakarta airport is better than any airport in the US.” But by far the flagship industrial policy of Widodo’s second term has been his bid to use Indonesia’s giant nickel reserves – tied with Australia as the world’s largest – to build a domestic electric vehicle industry. In 2020, the government permanently banned the export of nickel ore, forcing foreign companies, many of them Chinese, to start refining it onshore. While most of the finished product goes to the stainless steel industry, the goal is to start mining more of the higher-quality material for use in batteries. Indonesia is expected to provide a significant portion of the new nickel supply needed by the global electric vehicle industry, but its laterite ore reserves require more processing. Diggers at a nickel mine in Morowali Regency, Central Sulawesi, Indonesia. The country is blessed with the world’s largest reserves of the metal, a key component in electric batteries © Dimas Ardian/Bloomberg Widodo credits the restrictions with lifting the value of exports related to the nickel ore from $1.1 billion a year five years ago to nearly $20.9 billion last year. “Post [this]we can extract maybe more than 40 times or 60 times [more],” he says. “Indonesia has the largest nickel reserves in the world, about 21 million tons, [or] about 30 percent of the world’s reserves.” He adds that the next step could be to extend the policy to Indonesia’s large bauxite and copper reserves. Demand for the materials used to produce aluminum and renewable energy sources are also growing worldwide. While the EU has challenged the export restrictions for unfairly restricting European producers’ access to the World Trade Organization, Widodo is unapologetic. “It can create jobs for people and give added value for Indonesia,” he says. The plan to refine the Indonesian ore into battery-grade material is still just…
