Indonesian President Joko "Widodo" Widodo has only a narrow window to lock in reforms needed to insulate the economy from escalating trade ructions and slowing global demand, according to former Finance Minister Chatib Basri.
Chatib, who served in the role under previous President Susilo Bambang Yudhoyono, said Indonesia must ready itself for a protracted US-China trade dispute by undertaking “bold” reform, starting with an overhaul of stringent labor laws. But he warned that the opportunities Jokowi has right now after winning a second five-year term may not be around for long.
“At this moment his political capital is very strong,” Chatib said in an interview in Jakarta on Tuesday. But Jokowi must act “in the next two years or even next couple of months" before the parties in his coalition start thinking about their own legacy and prospects prior to the next election.
While US President Donald Trump and his Chinese counterpart Xi Jinping are expected to meet at the Group of 20 leaders’ summit in late June, there’s little sign of a lasting trade truce between the world’s two biggest economies. Officials in Indonesia are bracing for a fallout that could hamper efforts to boost exports and rein in a current account deficit that’s put pressure on the currency.
There’s an opportunity for Indonesia to lure foreign firms looking to exit China so they can access the US market, Chatib said. But that won’t happen without overhauling labor laws in Southeast Asia’s largest economy that offer generous severance packages and limit the country’s appeal to investors, he said.
In Indonesia, the severance pay for a worker with 10 years of tenure covers about 95 weeks, ranking only behind Sri Lanka, Mauritius and Sierra Leone, according to data from the World Bank. Vietnam, which has benefited from firms relocating from China, offers about 43 weeks.
While Indonesia’s economy has been growing at about 5 percent, that’s below historical marks and well short of the 7 percent target set by Jokowi ahead of his first term five years ago. The president was re-elected in April with an increased majority, boosting expectations he may look to unleash a new wave of reform.
“There is potential for investment to be relocated to Indonesia," Basri said. "Without that, and because of limitations of monetary and fiscal policy, Indonesia will remain stagnant and trapped with 5 percent economic growth.”