Adam Boehler meets with Jokowi to discuss investment opportunities. Image courtesy of US Embassy in Jakarta.
Adam Boehler, head of the US International Development Finance Corporation, was in Jakarta this week to discuss investment commitments with President Jokowi and his long-time fixer and Minister of All Ministries, former General Luhut Pandjaitan. Yeterday they announced that the US IDFC would be pumping $5 billion into Indonesia in the near future. So what does this mean for Indonesia’s investment outlook and economic prospects?
Essentially, nothing.
The first thing to keep in mind is that the Indonesian government loves to sign MOUs and make splashy announcements, preferably with large numbers and super ambitious goals. Remember the 30,000 MW of new generating capacity that we are still, for the most part, waiting for? Or, the new capital city - which was announced as if it was a done deal before they even commissioned a feasibility study? In essence, this is theater - meaningless public signalling. Over-promising is a way of life in the archipelago. The announcement yesterday contained no firm commitments and no project details. I wouldn’t take any of it seriously until there are firm commitments being made to back actual projects with details. Where is the project? What’s the cost estimate? How is the financing structured? Who’s the developer? Until we know that, this is just a wishlist.
So what is going on here? Well, there are three main things to consider here.
Indonesia Desperately Wants More Foreign Investment. In his first five-year term Jokowi has been on a building spree. Hundreds of kilometers of new toll roads, thousands of MW of new power plants, new hospitals, airports and housing developments going up all over the place. This has helped keep economic growth at 5% despite generally unfavorable global economic conditions. But it was also largely carried out by SOEs - massive state-owned companies implicitly guaranteed by the government of Indonesia. Private capital has been conspicuously absent, and Jokowi has made courting FDI the cornerstone of his second term in office in order to take some of the load off of the state and make growth more diversified and sustainable.
This is going to require serious structural reforms to Indonesia’s economy and regulatory architecture, as currently investors are often skittish because they have been burned in the past by cumbersome permitting processes, overlapping or unclear lines of authority, land acquisition delays, unreliable contract enforcement and weak rule of law, and generally ad-hoc and confusing policy-making.
So of course Jokowi is eager to get the IDFC to announce their intention to invest in the country. Mr. Boehler can claim, as he did, that billions in private investment will then follow. But without details that specifically address the issues above, it doesn’t mean a whole lot other than confirming what we already knew - that Jokowi wants FDI in any size, shape or form.
It’s a Geopolitical Balancing Act. China and Indonesia have a weird relationship. Indonesia is happy to welcome Chinese investment and tourists; but China is also asserting territorial claims over the Natuna Sea in what are clearly Indonesian waters. While everyone here in Indonesia was asking me if there was about to be World War III between the US and Iran this week, few locals were aware of the dust-up brewing in Natuna as Indonesia and China played out a game of maritime chicken over these disputed waters. This announcement is not just about investments then - it’s sending a signal to China that the US (and Japan… and Australia, I guess) are still major players in the region who can offset China’s dreams of hegemony.
Does the Trump Administration Know What It’s Doing? This one is easy. The answer is obviously no. They’ve been caught totally flat-footed in Southeast Asia, as everywhere else, because they have no strategy or plan. They belatedly tried to remedy this by consolidating several agencies into the IDFC last year and bulking up its financial resources in order to act as a check against China’s Belt and Road Initiative, which has been underwriting infrastructure development throughout the region for years. If Jokowi is eager to court FDI, the US side is also eager to make a big show of committing financial resources to the region so they don’t look like complete buffoons sitting on the sidelines while Southeast Asian economies keep chugging along at 5-7% thanks to big loans from China and Japan.
Will this work? Well, the smart money is probably always going to be against anything that Trump has touched. At the moment it doesn’t really seem like they have a plan for where the $5 billion is going to go; but again, as on the Indonesian side, the signalling is important here because it helps the US to at least make superficial claims that its international financing arm is competitive with China in one of the fastest-growing regions in the world.
So that is the long and the short of it. Yesterday’s announcement doesn’t mean much, but makes sense when you understand Jokowi’s desire for FDI and need to balance China, and the United States’ desire to jump into the region more actively. Now the thing to do, as always in Indonesia, will be to look past the meaningless headline and patiently wait and see what kind of firm financing commitments come out of this MOU, and for what projects. The devil, as they say, is always in the details.