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Business Updates | Indonesia's Upcoming 2019 Presidential Elections: What it Means for Investors

Indonesia’s democracy will be under the spotlight in 2019 when the incumbent President Joko Widodo (Jokowi) will seek a second five-year term. The country’s political landscape was tested in June of 2018 when Indonesia held simultaneous regional elections to elect governors, mayors, and district heads. With the 2019 presidential elections being the first time in which voters will also choose the legislative assembly, the results of the regional elections should not be understated as they provide clear insights into the mindset of Indonesia’s electorate as the campaigns for 2019 get underway.

Analysts, especially in the President’s party, the PDIP, were eagerly watching the results in Java where more than half of Indonesia’s population is located. If his party or political allies lost these provinces, Jokowi would face a tough re-election fight. West Java particularly — being the most populous — was a major test of the President’s economic policies. Central Java, East Java and North Sumatra are also key provinces with high populations.

The PDIP only gained a victory in Central Java, with incumbent governor Mr Ganjar Pranowo winning the election. In East Java, the PDIP-backed candidates were beaten by Ms Khofifah Indar Parawansa — a former social affairs minister in the Widodo cabinet, and in West Java, PDIP candidate Mr Tubagus Hasandudin was defeated by the popular former mayor of Bandung, Mr Ridwan Kamil. Both Mr Kamil and Ms Parawansa did, however, declare their immediate support for Jokowi’s re-election.  

In the fourth most populous province, North Sumatra, the PDIP also did not fare well. They opted for Mr Djarot Saiful Hidayat who was former Jakarta Governor Basuki ‘Ahok’ Purnama’s running mate for the Jakarta gubernatorial elections in 2017. Mr Hidayat eventually lost to North Sumatran native and retired military general, Mr Edy Rahmayadi. The PDIP did, however, win governorships in Bali, South Sulawesi, Maluku, and North Maluku.

The results show that support for the PDIP is waning in important provinces and the incumbent President needs to continue to garner support from popular governors in the mould of Mr Kamil and Ms Parawansa to secure a second term in 2019. However, it is important to note that presidential elections in Indonesia run very differently to regional elections as they remain firmly centred around personal politics and in the eyes of the electorate, voting for political parties and the President are two different things. Jokowi is thus hoping that, despite his achievements, he can also still rely on his image as the ‘people’s president’ as well as the backing of key political personalities to give him that extra edge in the race.

Vice Presidential candidates

As seen in the dynamic outcome of the Indonesian regional elections, the 2019 legislative elections are also of huge importance since they will determine each party’s standing in the subsequent elections in 2024. In July 2017, the People’s Representative Council also confirmed that only parties that have 20% of the seats in the legislature, or 25% of votes in the previous legislative elections, would be eligible to field a presidential candidate. This meant that only two candidates were essentially eligible, President Joko Widodo and former lieutenant-general Mr Prabowo Subianto; a repeat of the closely fought 2014 presidential elections.

Furthermore, the General Election Committee (KPU) stipulated that the campaigning period would last from October 2018 to April 2019 and that candidates and their coalitions had to register to the KPU by September 2018. Speculation then arose as to who would be the vice-presidential candidates for both camps. The President surprised voters when he announced the head of Indonesia’s influential Islamic Ulama Council, Mr Ma’ruf Amin as his candidate for Vice President. This was aimed at providing the President with a strong shield against identity politics attacks as he is often accused by opposition groups of being anti-Islam or not being ‘Muslim-enough’.

With what looked like a last-minute scramble by the opposition, Mr Subianto chose the recently elected Vice Governor of Jakarta Mr Sandiaga Uno as his running mate, thereby seemingly snubbing Mr Agus Yudhoyono, the son of former Indonesian President Susilo Bambang Yudhoyono and Chairman of the Democratic Party — a party supporting Mr Subianto’s bid — who for months had seemed a sure candidate for the Vice-Presidential seat.

Nine political parties have backed Jokowi for re-election, these include; the PDIP, PPP, PKB, Golkar, Nasdem, PSI, Perindo, the PKPI, and Hanura. Mr Subianto is supported by Gerindra, PKS, PAN, and the Democrats. Jokowi’s support from his coalition is reflected in his poll numbers with national surveys conducted by LSI and Alvara having him ahead on 52% and 53% respectively.

Jokowi’s achievements

After his election victory in 2014, Jokowi announced major policies to develop Indonesia’s economy and targeted GDP growth 0f 7%. This encompassed a five-year infrastructure improvement plan worth $400 billion USD aimed at turning Indonesia into the epicentre of Indo-Pacific maritime activity (See Indonesia’s Maritime Infrastructure: Key Challenges Remain), implementing social welfare programmes and streamlining bureaucratic processes. He introduced 16 economic policy packages with the aim to improve the ease of doing business and introduced a successful tax amnesty program (See Indonesian Government Banking on Tax Amnesty to Plug Tax Shortfall).

These policies resulted in Standard & Poor, Fitch Ratings, and Moody’s adjusting Indonesia’s sovereign bonds rating from junk status to BBB-; signifying an adequate ability to repay national debts (See Indonesia’s New Credit Rating: What Does This Mean for Investors?). Furthermore, foreign direct investment grew by 8.5% in 2017 compared to 2016, attracting $32 billion USD, up from $29 billion USD. Indonesia was also ranked 72nd out of 190 countries in the World Bank’s 2018 Ease of Doing Business report, rising 19 places compared to 2017, in addition to improving its ranking from 63rd to 43rd amongst 160 nations in the World Bank’s Logistics Performance Index ranking — slashing costs of basic goods in far-flung and remote regions of the country such as in Papua (See Indonesia’s Logistics Sector; Making Connections).  

With only a few months remaining until the presidential elections, the Jokowi government still faces an uphill battle to reform key sectors of Indonesia’s economy. Amid the rupiah depreciation, Indonesia’s stocks and securities are still considered highly undervalued and the country shows promising signs that in the long-term, it will continue to offer valuable investment opportunities for international investors willing to hold their nerve.

The current business climate

Despite his efforts at bureaucratic reforms, the President could not achieve his GDP growth target of 7%, in fact, GDP growth has stagnated on 5% over the last few years; a point no doubt the opposition will attack in upcoming debates (See Indonesia's 2019 Economic Outlook: Challenging Times amid Political Turbulence). The rupiah has also weakened against the dollar by surpassing an exchange rate of 15,000 IDR to the USD for the first time in 20 years — not since the 1998 Asian financial crisis — although this is a pattern being mirrored by other emerging markets.

Rising US interest rates, a widening current account deficit, and weak commodity prices are factors contributing to the rupiah’s decline. Moreover, crude prices have tripled since 2016, ratcheting the cost of imports. The currency has continued to weaken to a cumulative decline of 10% this year even though Bank Indonesia has tried to intervene by raising interest rates five-times since May 2018.

The head of Bank Indonesia, however, expects pressure on the rupiah to ease in 2019 as the country takes measures to narrow the current-account deficit. Furthermore, the central bank is projecting that global investors will not keep their funds in cash for too long and will reinvest in emerging markets such as Indonesia, as well as there being fewer Fed hikes expected in 2019 (Indonesia’s Fragility & The Fed). The pressure on the rupiah and the resulting pressures on the cost of living will no doubt be key deciding factors in this election for voters.

In response to the immediate economic situation, President Joko Widodo has implemented several protectionist measures despite making inroads against such policies in 2014 and 2015. He has halted some $20 billion USD of infrastructure projects and has postponed others for the next six years. Additionally, he has instructed his ministers to keep fuel prices stable over the next few years. But, due to consumer expectations and the political climate, the current fuel subsidy policy may prove troublesome for the government going forward. To counter this, as of 1st September 2018, the Indonesian government has introduced a 20% biofuel mixed-use diesel to all diesel engine vehicles in Indonesia, hoping that this policy can save on foreign exchange, utilize more local resources, as well as reduce imports of fuel oil.

The wait and see approach

Global investors and businesses are expected to resort to a wait and see approach and apply a brake on investment plans until the conclusion of the presidential elections given the echoes of 2014. Nonetheless, Indonesia’s consumer confidence index has remained steady above 120 points throughout 2017, indicating that Indonesian consumers, the bedrock of Indonesia’s internally reliant consumptive economy, are seeing a positive economic outlook in the near future.

Moreover, the ongoing trade war between Indonesia’s two biggest trading partners, China and the USA have also begun to take its toll on the country’s economic growth. Indonesia is also a target of the trade war as the country experienced a trade surplus of $9 billion USD as of 2018 (See The US Presidential Elections and What it Means for Indonesia). Such uncertainties mean that political analysts are expecting a similar slowdown in short-term business activity as was witnessed in 2014, specifically amongst the Chinese Indonesian community.  

With the latest polls showing the incumbent President slightly ahead at around 54%, it is still too early to pick a clear winner, however, if opinion polls narrow between the two candidates, it is likely to create a further a drop in business confidence, creating more pressure for Jokowi. Should we see a change in leadership take place, this would undoubtedly create short-term market turmoil and further pressure on the rupiah. That being said, Indonesia’s future strengths as an investment destination rely on the continued expansion of the middle-class through increasing internal consumption, infrastructure development, and structural economic reforms; regardless of political leanings and identity politics.

Global Business Guide Indonesia - 5th November 2018

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