By Kanupriya Kapoor and John Chalmers
JAKARTA (Reuters) - During the first months of this year, President Joko Widodo was an embattled leader grappling with Indonesia's most serious political and religious tensions in two decades. Now, he has come through the storm looking stronger than ever.
His popularity is near record highs and, thanks to deft maneuvers against foes trying to exploit a blasphemy case against one of his allies, Widodo has stamped his authority on the ruling coalition, parliament and the security forces.
The quietly spoken former furniture salesman may have proved his political mettle, but his next challenge is an economy that refuses to respond to conventional policies to fire up growth. That could dent his re-election chances in 2019, especially with a budget that won't stretch to lavish government spending.
Senior government officials worry that Widodo has been distracted by the battles with political opponents and taken his eye off the economy.
"We are suffering from bad policy right now ... if we don't fix it or we don't regain the initiative I could easily see GDP growth going down, and is that a risk you want to take?" said one senior government official, who asked not to be identified.
According to a June survey, nearly 60 percent of people polled were satisfied with Widodo's performance, almost an all-time high. But the poll also showed high expectations that he would deliver on promises to revive the lackluster economy.
"If he doesn't perform on the economy, that would give ammunition to the opposition to challenge Jokowi in 2019," said Djayadi Hanan of the Saiful Mujani Research Center, a Jakarta-based pollster, using the president's nickname.
Indonesia's GDP growth has shambled at around 5 percent for the past two years, too low to lift the country out of the middle-income trap, largely because domestic consumption - once the engine of the economy - and bank lending have been sluggish.
An unexpected cut in interest rates last month highlighted the struggle to lift growth despite government initiatives, including a tax amnesty program, an infrastructure drive, and a series of regulatory tweaks designed to make business easier.
The government has little fiscal room to breathe life into the economy: the budget deficit is already close to a legally mandated ceiling of 3 percent of GDP and parliament could impeach Widodo if he allowed the deficit to run past that limit.
David Sumual, chief economist at Indonesia's Bank Central Asia, said a hike in electricity tariffs and slow disbursement of subsidies to farmers have weakened the purchasing power of middle- to lower-income households. Meanwhile, higher-income groups are worried that the government is pushing for aggressive tax reform that will leave them less well off.
"The problem now is confidence in the prospect of the economy. People don't want to spend," Sumual said.
In his state-of-the-nation address last month, Widodo pledged to tackle income inequality by cutting red tape and making land acquisition easier to accelerate infrastructure projects. And last week he urged his cabinet to focus on attracting investment to boost growth and create jobs.
But two officials who spoke to Reuters said they worried he was not matching his rhetoric with bold steps that need to be taken now for growth to be marching higher next year, when campaigning for the 2019 presidential election will begin.
On the to-do list remains finding a way to rein in the overbearing dominance of state-owned enterprises on the economy, which was singled out by the World Bank in July as something preventing private funds flowing in.
In addition, there is a need to speed up efforts to tackle a tortuous regulatory and licensing regime to lift investment, an area where Widodo said last week, during the launch of a new policy package, "there's so much we have to improve, so much to fix".
RISK OF COMPLACENCY
Just months ago, Widodo appeared to be fighting for his political survival as political opponents joined forces with radical Islamist groups to foment popular fury over alleged blasphemous comments made by Widodo's ally Basuki Tjahaja Purnama, the former Christian governor of Jakarta.
Amid massive protests in central Jakarta, there were rumors of treason plots and even a military takeover.
Beating the drum of Indonesia's "unity in diversity" motto, Widodo embarked on a frenzy of public appearances at military barracks, the homes of both political rivals and allies, and at moderate Islamic boarding schools - all aimed at projecting an image of unity and control.
"He has been busy in the past six to eight months fighting back against destabilizing forces," said Endy Bayuni, editor-in-chief of the most widely read English daily, the Jakarta Post.
"He's showed that he is very much in control of the situation and has become even more mature as a politician."
Widodo's latest move to regain political authority took aim at hardline Islamist groups. By executive decree, he banned Hizb-ut Tahrir, a group that calls for Indonesia to be ruled by Islamic sharia law, saying its ambitions ran counter to the country's secular ideology.
Such political dominance could provide Widodo with a false sense of security, the senior government official said.
"The dark side of the story is ... the economy," he said. "I think the biggest threat now, potentially – and it's the flip side of the incredibly strong political position he is in – would be complacency."
(Editing by Ed Davies and Alex Richardson)