Indonesia Tries Jolting Economy With Budget Boost

By I Made SentanaFeaturesDow Jones Newswires

Indonesian President Joko Widodo unveiled a proposal Wednesday to increase public spending in the coming year to improve flatlining economic growth.

In a speech to Parliament on the eve of the anniversary of the country's independence, Mr. Widodo announced a budget plan to increase spending by 3.3% to 2.2 quadrillion rupiah ($165 billion) to boost economic growth to 5.4% from 5.2% expected this year.

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The growth rate would be well under the 8% Mr. Widodo predicted when he was elected in 2014, but Indonesia hasn't fully recovered from the collapse in commodities prices five years ago and economic reforms that Mr. Widodo would spark foreign investment haven't erased a deeply embedded economic nationalism.

Southeast Asia's largest economy, with a population of 250 million people, grew just 5.01% from a year earlier in the second quarter as consumer spending remained weak.

Mr. Widodo said he would use the increased public spending, funded largely by better tax collection that he has prioritized over the past year, to build hundreds of miles of new roads and improve education, health care and other social programs.

"The 2018 budget must be able to act as a fiscal instrument to boost economic growth and reduce poverty and the income gap," Mr. Widodo told parliament.

Lawmakers will discuss the budget proposal with the government before voting on it in October. With parties in support of Mr. Widodo controlling 347 of the total 560 seats in legislature, analysts expect it to pass with few changes.

The coming year will be important for Mr. Widodo to deliver on the campaign promises he made to spread development to more parts of this archipelago nation if he is to win re-election in 2019, analysts said.

"I think his re-election chance is still very big so long as he can prevent economic growth from reversing, and keep his economic reform rolling," said Bank Permata's economist Josua Pardede.

Mr. Widodo, a charismatic former furniture maker who is Indonesia's first president not to emerge from the military-political elite, retains approval ratings above 60%, but he suffered a setback in the jailing of his close ally and successor as governor of Jakarta, Basuki Tjahaja Purnama.

Mr. Purnama, the most prominent politician from the ethnic Chinese minority, is serving a two-year sentence for blasphemy for making a joke about a verse of the Quran, an issue mobilized hundreds of thousands of Islamist hard-liners in the streets. Mr. Widodo has warned of the emergence of identity politics undermining Indonesia's secular system.

When Mr. Widodo was campaigning in 2014, he promised to boost infrastructure spending to build roads and railways. He also promised 65 new dams, 35,000 added megawatts of power capacity, and one million low-cost houses. Most of these projects are uncompleted or haven't started.

The president is targeting to generate 1.878 quadrillion rupiah ($141 billion) in government revenue, of which 86% will be from tax collection. The target is 8% higher than in 2017.

DBS economist Gundy Cahyadi expects that the budget deficit next year to be slightly higher than Mr. Widodo's proposal of 2.2% of GDP. "But we continue to regard Indonesia's fiscal position as a strength and we are not worried about fiscal deficit at this juncture," Mr. Cahyadi said.

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(END) Dow Jones Newswires

August 16, 2017 08:03 ET (12:03 GMT)