Tuesday , August 4 2020

Indonesia stirs ghosts of 1998 with deficit debate

When even Indonesia starts talking about relaxing deficit rules, you know government spending is back in vogue as a remedy for faltering economic growth.
The country has more reason than most to be wary of backsliding on its commitment to budget discipline. Its deficit ceiling is an important piece of the economic and political architecture that emerged from the Asian financial crisis of the late 1990s. Indonesia experienced more than just a run on the currency, a deep recession and a rescue by the International Monetary Fund (IMF). The crunch morphed into riots, communal violence and the overthrow of dictator Suharto, who had ruled with military backing for more than three decades.
So the news that President Joko Widodo’s government is considering easing its self-imposed limit is a political jolt. The cabinet is discussing whether and how to relax legal requirements that the budget deficit be restricted to 3% of gross domestic product, Finance Minister Sri Mulyani Indrawati told Karlis Salna of Bloomberg News. For now, the government will adhere to the cap, Indrawati said.
The debate makes sense. Leaders in Japan, India and China have eased fiscal policy. Singapore is likely to open the spigots in a few months.
With central banks widely seen to have almost exhausted their scope for interest-rate cuts, there’s growing recognition that help is required to buttress growth. The IMF has been banging this drum for a while. Contemplating such a step puts Southeast Asia’s biggest economy firmly in the global mainstream. That’s great for the region and good for the world, given the steady downgrades in GDP estimates.
Indonesia’s willingness to publicly countenance a relaxation says much about how it now views the events of two decades ago. From the wreckage of the crisis emerged a more democratic country with a more accountable executive and legislature. The idea behind limiting the deficit was to discourage a buildup of debt. The basic ethos, as I wrote here, was: never again.
But circumstances change, economies and policy priorities evolve. It’s important that decision makers don’t blindly tie themselves to the past. What looks perfectly rational in the context of a different era doesn’t necessarily apply in times of ultra-low borrowing costs, trade conflict and slacker global growth.
It’s also sensible to begin the debate now, when Indonesia’s shortfall is closer to 2% than 3%, rather than wait until the dam is almost breached. That would risk looking desperate.
Indrawati suggested adjusting the 3% cap so that it becomes an average over a five-year period rather than applying to a given 12 months. That sounds like a neat compromise. It acknowledges the need for flexibility but demonstrates Indonesia is alive to the dangers of relaxing too much.
Over at Bank Indonesia, the discussions are probably being greeted with relief. The central bank, traditionally more cautious than most of its peers, has shaved rates by a full percentage point this year. It’s likely there are a few more to come, but Governor Perry Warjiyo will welcome the burden sharing.
Jokowi, as Indonesia’s president is known, is swimming with the global stimulus tide, but also eyeing his legacy. Fresh from being sworn in for a second and final term, he has made no secret of his desire to push economic growth beyond the 5% average of his first five-year mandate. He campaigned on lifting the pace of expansion to 7%.
The coming year is shaping up as a watershed for global economic policy, where fiscal levers are properly embraced, says Rob Subbaraman, head of global macro research at Nomura Holdings Inc. in Singapore. It’s fitting that Indonesia share the lift. The country should just be careful not to forget the past.

—Bloomberg

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

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