Seven months out from April 2019 elections, President Joko Widodo’s appears to be facing one of his worst nightmares with the Indonesian rupiah now at its lowest level since the devastating 1997-98 financial crisis, an event that remains embedded in the national psyche.

Finance Minister Sri Mulyani Indrawati has already lowered the growth target in the 2018 Budget from 5.4% to 5.3%, worried about the risks posed by US President Donald Trump’s protectionist trade policies and the US Federal Reserve’s planned rate hikes through 2019.

Both factors, a threatened global trade war — and especially a current account deficit of US$8 billion in the second quarter of this year, or 3% of GDP – are seen as responsible for the weakening rupiah, which at 14,960 to the US dollar has lost 9.2% of its value so far this year.

Maritime Coordinating Minister Luhut Panjaitan, the president’s chief political adviser, circulated today (September 7) a lengthy message on WhatsApp, saying the currency issue had been a topic of “intense discussions” in the government for the past three weeks.

“I don’t see Indonesia to be in a major crisis,” he wrote, in outlining the causes of the rupiah’s slump and what was being done to manage it. “There is no need to worry that a crisis such as 1998 will re-occur today. Conditions are very different from 1998.”

Economic Coordinating Minister Darmin Nasution described last week’s latest slide as “illogical,” though it is clear events in Argentina and Turkey are also driving emerging market concerns, with the Indian rupee now at its lowest-ever level.

Analysts say foreign domination of Indonesia’s bond market, high US dollar debt loads of Indonesian corporations and the fact that 40% of the government’s debt is denominated in foreign currencies leaves little room for confidence in the rupiah.

A worker removes bundles of rupiah banknotes at the headquarter of the state-owned Bank Negara Indonesia (BNI) headquarters, in Jakarta. Photo: Reuters / Supri
A worker removes bundles of rupiah banknotes at the the state-owned Bank Negara Indonesia’s (BNI) headquarters in Jakarta. Photo: Reuters/Supri

“Don’t panic,” said Panjaitan, who is a member of Widodo’s economic team. “Our economic conditions and our government are far stronger than Argentina and Turkey. I also ask you not to worry about global uncertainties.”

Last month, Widodo took the highly respected Indrawati off his campaign team so she could concentrate on the economy, particularly now that opposition rival Prabowo Subianto has signaled his intention to target the president’s record on that front.

The falling currency is only one symptom of a wider malaise. Indonesia’s growth rate has remained stuck on 5% for Widodo’s entire presidency, a far cry from the 7%-plus he had promised. That underperformance has also raised serious questions about why he felt compelled to choose an ageing Muslim cleric as his running mate.

On the other hand, Prabowo’s surprise last minute choice of deputy Jakarta governor Sandiaga Uno, 49, brings him not only much-needed funding, but also a wealth of business experience and an expectation of attracting a bigger share of the country’s estimated 80 million millennial voters.

Prabowo’s first choice, incumbent Jakarta Governor Anies Baswedan, 49, who apparently turned him down to pursue his own political presidential ambitions in 2024, would have added little value to a ticket that is now looking a lot stronger than earlier anticipated.

When Uno appeared before a business forum soon after his nomination, participants were reassured by his support for a free market economy and the need for more foreign direct investment (FDI), which dropped by 12.9% to just $6.5 billion in the second quarter compared to the same period last year.

Indonesia-Sandiaga Uno-Deputy Governor-Jakarta
Vice Presidential candidate Sandiaga Uno says he’s market-friendly. Photo: Facebook

Businessmen put that down to concerns about potential policy shifts ahead of the April 2019 elections. But they also say the government must revise its so-called “Negative List” of sectors closed to foreign investors if it wants to stimulate foreign capital inflows that benefit the real economy.

The oil and gas sector, in particular, has fallen on hard times because of a lack of genuine incentives for deep-water exploration. Petroleum investment reached US$3.9 billion in the first seven months of this year, well short of the amount needed to achieve the government’s $14.2 billion annual target.

As widely predicted, production from the fast-maturing Mahakam gas-field, now the country’s second largest field behind BP’s West Papua operation, has fallen sharply since state-owned Pertamina took over the block from French energy giant Total last December.

Shell-shocked by regulatory uncertainty and bureaucratic ineptitude, foreign innvestors now want to see whether Prabowo drops his previous stance as a resource nationalist and allows Uno to set the opposition coalition’s economic agenda in a more market-friendly way.

On top of urging exporters to convert their dollars into rupiah, Bank Indonesia has raised interest rates by 125 basis points since May and spent about US$14 billion in foreign reserves, still at a relatively healthy $118 billion, to prop up the rupiah.

The government has also recently imposed a new excise tax regime aimed at curbing the importation of 1,140 mostly consumer goods, but it appears to have little in mind for increasing foreign currency-earning exports apart from offering fiscal incentives.

Indonesian President Joko Widodo speaks during the reopening of the stock market after the new year at the Bursa Efek Indonesia (Indonesia Stock Market) in Jakarta on January 4, 2016. The slowdown in China's economy, coupled with the shock devaluation of the yuan and uncertainty over a possible US Federal Reserve rate hike, has battered Indonesia's market and currency in 2015. AFP PHOTO / ADEK BERRY / AFP PHOTO / ADEK BERRY
Indonesian President Joko Widodo speaks at the Jakarta stock exchange, January 4, 2016. Photo: AFP/Adek Berry

Analysts blame that on a lack of FDI, pointing to the way Widodo embraced many of his predecessor’s nationalist policies introduced during the 2004-2012 commodity boom without understanding their impact on a changed global business climate and overall investor sentiment.

The president’s concerns became apparent after he called a meeting of key ministers in late July to discuss the country’s foreign exchange reserves strategy. At that meeting, he called for the use of more biodiesel and import substitution “to temporarily stop, reduce or suppress items that are not considered strategic.”

Small manufacturers, many of them ethnic-Chinese owned, already complain about the difficulty of importing components. “They’re very unhappy and feel the government is doing nothing to help,” says one economist. ”But they also don’t want to vote for the other side (Prabowo). They’re confused.”

In the latest Indonesian Survey Circle (LSI) poll, taken after the vice presidential nominations were announced on August 9, Widodo still has a 52.2%-29.5% lead over Prabowo, though 18.8% are undecided and the 2014 presidential race a constant reminder that the gap can narrow fast.

With the Prabowo-Uno ticket homing in on social inequality and what it claims is a dysfunctional government, the next few months will be crucial to Widodo’s re-election chances, which suddenly could be defined by his government’s ability to control the price of basic commodities.

A woman holds a package of food during shopping at a Foodmart Fresh supermarket in Jakarta, Indonesia June 8, 2016. Photo: Reuters/Beawiharta
A woman holds a package of food while shopping at a Foodmart Fresh supermarket in Jakarta, June 8, 2016. Photo: Reuters/Beawiharta

Lawmakers from Prabowo’s Great Indonesia Movement Party (Gerindra) are already balking at a 32% increase in social spending included in the 2019 draft budget, rising from this year’s 287 trillion rupiah (US$19.6 billion) to 381 trillion rupiah ($26.05 billion). The funds are scheduled for distribution to the 40% of the population hovering below or just above the poverty line.

While the government plans to dedicate a significant share of the funds to the National Health Insurance program and non-cash food assistance, as part of the country’s well-established social safety net, economists say job creation is equally important in ensuring that efforts to reduce poverty are sustainable.

Private consumption appears to have recently picked up due to an improved, though hardly robust labor market. But while annual consumer inflation was 3.18% in July, below market expectations, average food prices rose by 5.3% from 4.6% the previous month.

Still, economists worry about so-called “hidden inflation,” referring to the government’s reluctance to pass on higher world fuel costs. That, and Widodo’s populist same-price fuel policy, has forced a 66% increase in energy subsidies in the 2019 budget – four years after the newly-installed Widodo won widespread acclaim for slashing the price supports altogether.

“He’s just focused on winning,” says one former economic minister, who believes that while Widodo will be remembered for his unprecedented infrastructure program, his economic management remains his Achilles heel. “After that, he will have to decide what to do next.”