Indonesian President Joko Widodo says Southeast Asia’s biggest economy can achieve the official growth target of 5.7 percent this year. That could be a taller order than he anticipates.

Joko, who took office in October, inherited an economy fettered by years of under-investment in infrastructure, plunging commodity prices and the withdrawal of US monetary stimulus.

The central bank has kept monetary policy tight to protect a vulnerable rupiah and gross domestic product probably grew 4.9 percent last quarter from a year earlier, the slowest pace since 2009, according to a survey.

The president is promising to rev things up by fast-tracking large road, port and power projects and cutting red tape.

He’s seeking to woo investment and boost non-commodity exports, targeting an expansion of as much as 6.3 percent to 6.9 percent next year.

“We are confident to have the target of our economic growth” of 5.7 percent this year, the president said in an interview on Sunday. “But we must increase our exports volume and we must reform our bureaucracy. We must invite FDI.”

Yet the World Bank sees Indonesia growing 5.2 percent this year and 5.5 percent in 2016. The economy probably expanded 5.06 percent in 2014, according to a survey ahead of data due Feb. 5 in Jakarta. Here are five things that could stand in the way of Indonesia’s growth goal for this year.

Commodity prices
The prices of Indonesia’s key commodity exports may not recover anytime soon. Coal has fallen further this year and has now more than halved in price since the end of 2010.

Palm oil capped the biggest January decline since 2010 as demand weakens amid a supply glut, after slumping 16 percent in the past year.

While the plummeting price of crude presented Joko with an opportunity to scrap gasoline subsidies, it will also sap government revenue.

The state will lose about Rp 158.8 trillion ($13 billion) of revenue because of the drop in oil prices, according to a Nomura Holdings research note last week by economists including Euben Paracuelles in Singapore. That negates much of the Rp 230 trillion of budget savings freed up by the fuel subsidy overhaul.

Sticky deficit
Indonesia was dubbed one of the fragile five emerging- market economies by Morgan Stanley in 2013 because its large external deficit made it vulnerable to capital outflows.

While the shortfall in the current account has narrowed from a record 4.4 percent of gross domestic product in the second quarter of that year, Bank Indonesia is forecasting a deficit of 3 percent to 3.5 percent of GDP this year, compared with an estimate for about 3 percent in 2014.

The big infrastructure projects being promised by Joko could spur imports, putting pressure on the balance, according to Ndiame Diop, the World Bank’s lead economist for Indonesia. This persistent deficit makes it more difficult for Bank Indonesia to follow global peers in cutting borrowing costs to bolster economic growth.

Standard Chartered said most of its Indonesian clients see the central bank holding or increasing its policy rate in 2015, according to a note released on Tuesday.

Implementation risks
The stand-off between Indonesia’s police force and its anti-corruption agency, the KPK, has dominated local media in recent weeks. A failure by the president to show strong leadership could undermine his credibility for pushing ahead with economic reforms and cracking down on graft.

“There could be a rippling effect,” the World Bank’s Diop says.

He also points out that about 50 percent of the central government budget is actually managed by subnational governments, raising the possibility that the implementation of infrastructure and social spending will be slower than expected because of the difficulty in transmitting policy from the top.

The global economy is unlikely to provide much support to Indonesia this year, with weaknesses in Japan, Europe and China, Indonesia’s largest export market. Meanwhile, a recovery in the US is forecast to prompt the Federal Reserve to raise interest rates, reducing the appeal of higher-yielding assets in emerging markets like Indonesia.

“This is going to be a very tough year externally,” said Mari Pangestu, a former Trade Minister, in an interview on Wednesday.

A strengthening US economy and slowing growth in China is a “bad combination” for Indonesia as commodity prices will probably keep falling, said Benedict Bingham, the International Monetary Fund’s senior resident representative in Jakarta.

Time lag
The economic overhaul being promised by Joko could take time to benefit the economy. Large infrastructure projects may take a while and the goal of lifting non-commodity exports is dependent on increasing the supply of skilled labor.

“Whether we can actually roll out the infrastructure projects fast enough is really the big question mark,” Pangestu said. “The concern is about implementation.”

The government also needs to review its trade and labor policies, which look more defensive rather than focused on winning global market share, according to Bingham.

“2015 needs to be seen as a year in which the foundations for the medium-term strategy are set,” he said. “It’s not going to be a year where the payoff from this strategy is going to become immediately apparent.”

Bloomberg

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Source: The Jakarta Globe