Indonesia’s Election Results Boost Economic Optimism

July 28, 2014 Posted by ASEAN Briefing Reading Time: 4 minutes

JAKARTA – Joko Widodo, the former governor of Jakarta, was declared the next president of Indonesia last week, leaving foreign investors optimistic about the country’s economic prospects and triggering a favorable reaction from the rupiah.

The intense election split Indonesia into two camps backing two very different candidates– Widodo, a former furniture seller who worked his way to the top through local government, and his rival Prabowo Subianto, an ex-general with strong links to former Indonesian president Suharto. In the end, Widodo’s corruption-free reputation and down-to-earth attitude trumped Subianto’s political experience, making him the first leader from outside of the political and military elite to have ever been elected as president of Indonesia.

Top of Widodo’s agenda when he assumes office will undoubtedly be how to best manage Southeast Asia’s largest economy. Indonesia’s Q1 2014 growth rate of 5.21 percent marked a five year low, in part due to the country’s ban on the export of unprocessed mineral ores and the falling prices of minerals and agricultural commodities.

The president-elect has stated his goal of achieving seven percent annual GDP growth – a rate unseen in Indonesia since the 1997 Asian Financial Crisis- within the next two years. In order to return to the levels of growth seen in the early 1990s, Widodo has announced his intention to improve the country’s manufacturing sector, invest in education and employee training and reduce corruption, for example by moving tax collection and government procurement online. Widodo has also asserted that he will be stepping up infrastructure spending in a bid to increase FDI flows into the country.

Although Widodo has thus far remained reasonably vague regarding the specifics of his vision for the economy, there is significant confidence among analysts and investors that the new president-elect will be able to relieve investment insecurity and implement the necessary policy changes to boost economic growth.

Optimism about the prospects of Widodo’s election success triggered a favorable reaction in the Indonesian markets even before the election result was announced, with the Jakarta Composite Index rising by 20 percent overall this year. Stocks increased by one percent on Wednesday following the conclusion of the election – the biggest advance since the beginning of July – and the rupiah also climbed by one percent to a two-month high, trading at 11,488 per U.S. dollar.

However, the road ahead is far from smooth for Widodo. Indeed, he has already met his first hurdle as Subianto mounts a legal challenge to the election result, alleging widespread electoral fraud. Additionally, Widodo will have to deal with infighting and indecisiveness within his party, as well as potential challenges within parliament arising from only holding one third of body’s seats compared with the two thirds of seats held by Subianto’s coalition.

For investors waiting to judge whether or not Widodo will have a positive impact on the Indonesian economy, the president-elect’s first test will be how quickly and effectively he tackles the thorny issue of fuel subsidies, which currently cost the government approximately US$20 billion every year. Fuel subsidies currently receive more government funding than infrastructure or healthcare, tying up money that could otherwise be used for large infrastructure projects that would create jobs and attract further investment.

In May, Widodo stated that the fuel subsidies could be gradually reduced within four years with the funds instead being diverted to subsidize fertilizer, seeds and irrigation for farmers and diesel oil for fishermen.

“Clearly he understands that subsidy rationalization is a key concern in the market, and the negative perception that lingering uncertainty creates, among foreign investors,” said Wai Ho Leong, a Singapore-based senior regional economist at Barclays Plc.

“If he has bold long-term plans to step up infrastructure spending, he has to have an equally bold vision on how to cut back on subsidies to free up fiscal resources.”

As the largest economy in Southeast Asia comes to an economic crossroads, analysts and investors will be keenly watching Indonesia in the coming months to see how the new administration performs.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email indonesia@dezshira.com or visit www.dezshira.com.

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