By Rieka Rahadiana and Jonathan Thatcher
JAKARTA (Reuters) - Indonesia's government is confident that a slide in economic growth, exacerbated by recent capital flight from emerging markets, is a hiccup that will soon pass. The price of oranges in a Jakarta market gives a clue why that faith looks misplaced.
Domestic demand should certainly get a healthy boost next year from spending during parliamentary and presidential elections. But that masks problems with the basic drivers of growth that some doubt will get more than cursory attention until a new government has to confront them in late 2014.
To appreciate the size of the problem - and why Indonesia's economy struggled, even in the last few years of stellar growth, to match its potential - consider the humble citrus fruit.
A farmer in Indonesian Borneo can grow a kilo of oranges for about the same price, or cheaper, than his counterpart in China. By the time they are bought by a shopper in the capital, though, the price of the Chinese oranges is up to 50 percent cheaper - even though they traveled nearly three times further.
An inefficient distribution system and failing infrastructure have long been on the list of fundamental issues holding back Southeast Asia's biggest economy from finally propelling itself to the next economic level.
The tide going out on the flood of money that had poured in from booming global commodity prices and investors hunting higher returns simply lays barer the lack of investment in economic building blocks like infrastructure and education.
One Jakarta-based foreign economist said the twin bonanzas of high commodity prices and cheap funding had "sucked the oxygen out of serious reform".
"It gave a false sense of security," said the economist, who asked not to be named because he was not authorised to speak to media on the issue.
Indonesia has been one of the emerging markets hit hardest by expectations that the U.S. Federal Reserve will soon start to pare back its monetary stimulus, pushing up borrowing costs worldwide.
The government, nonetheless, expects growth to rebound next year, and predicts the current account deficit, a particular source of investor concern, will narrow.
Officials concede the government missed a chance when the economy was riding high at 6-plus percent growth and foreign investment - both direct and portfolio - was at record levels.
"Indonesia lacks focus. It's easily distracted," said the head of the Finance Ministry's think-tank, Bambang Brodjonegoro.
He said the shock of seeing the rupiah plunge nearly 14 percent this year was a wake-up call and his ministry wanted more fiscal measures following an emergency package late last month to try to stem further attacks on the currency.
"What we are afraid of is that people will forget," he said of the reform efforts. "The momentum has to be sustained."
By International Monetary Fund estimates, Indonesia's economy will grow 5.25 percent this year, its lowest since 2009.
Even then, the world's fourth most populous nation will be heavily dependent on domestic demand at a time when interest rates have risen sharply to defend the rupiah and inflation is at 4-1/2 year highs - the result largely of a jump in fuel prices and mismanagement of the supply of some staple foods.
Consumer spending is likely to be "the next shoe to drop", according to Credit Suisse Asia economist Robert Prior-Wandesforde, who forecasts GDP growth this year of 5.7 percent, followed by 5.3 percent next year.
"After a few years of unsustainably strong growth, the country is heading in to at least a couple of years of sub-trend activity," he wrote in a note.
In 2012 growth was 6.23 percent. The government forecast for next year is 6.4 percent.
As he comes to the final year of his second five-year term, President Susilo Bambang Yudhoyono has faced mounting criticism for his government's muddled approach.
"The coordination between ministers is now out of sync," said another senior economic official, who asked not to be identified because of the sensitivity of the issue.
The current account deficit, running at an unsustainable level of more than 4 percent of GDP, is heavily skewed by domestic structural issues including fuel price subsidies and a thirst for imported capital goods that suggest it will be hard to tame.
Many worry that political leaders are already so wrapped up with next year's elections that there is no chance of substantial policy initiatives, such as another cut in budget-busting fuel subsidies, this side of the polls.
Business leaders welcomed the latest fiscal measures, including tax breaks, but were sceptical they will do much.
"The government always delays. It makes us a bit frustrated., said the head of Employers' Association of Indonesia (Apindo), Sofjan Wanandi.
"There is an urgency now," he said of the ballooning current account deficit, which triggered the past month's exodus from the rupiah and shares.
A relatively weak manufacturing base and rise of commodities in the export tally is also a major concern, making Indonesia more vulnerable to external shocks.
Poor infrastructure, rising wage costs and still limited skills of its workforce, mean that, while it cannot compete with very lowest cost producers, like Bangladesh, it also struggles to match more advanced manufacturing nations such as Thailand and Malaysia.
"This ... reflects a more serious problem in the economy: the de-industrialisation of some manufacturing sectors," Standard Chartered Bank wrote in a report this month.
Indonesia's workforce is the largest in east Asia after China, but about two-thirds of it is in the informal sector, mostly underemployed and low-skilled.
The recent years of rapid growth have widened the gap between rich and poor and there is little sign that education, widely cited as a major barrier to future growth in one of Asia's youngest societies, is improving fast.
The president's special envoy on poverty alleviation, H.S. Dillon, estimated that about 100 million of the 240 million population live below $2 a day and criticised the lack of coordination to resolve the issue.
He calculated that so many different agencies were involved that the government spent about 80 million rupiah ($7,200) per person on poverty programmes.
"It would be better to give the person 8 million (rupiah)."
($1 = 11,065 rupiah)
(Writing by Jonathan Thatcher; Editing by Alex Richardson)
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