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New Government May Reinvigorate Indonesia's Investment Appeal
When the election committee announced on 22nd July 2014 that Joko Widodo had won the race to become Indonesia's next president, the markets reacted with a stronger Rupiah and higher stock market index, adding to gains made over the preceding weeks in anticipation of the same outcome. The election campaign had evolved into an increasingly tight contest between Widodo and former army general Prabowo Subianto, causing some market jitters in the days before the vote. Following a last-minute 'withdrawal' from the contest when it became clear he had lost, Subianto appealed to the Constitutional Court over what he claimed were widespread irregularities, but observers give a challenge of the results little chance of success.

New Government May Reinvigorate Indonesia's Investment Appeal
Protectionist trade policies are not likely to change from within, but Indonesia's obligations under multilateral trade agreements will make some non-tariff trade barriers increasingly hard to defend amid deepening regional integration
 

With the election over and done with, the valuation of Indonesian stocks and the country's currency traded near two-month highs. Already back in March, Barclays Bank economists had expressed their view that a Widodo victory could positively impact Indonesia's credit rating. It appears that investors, at least those concerned with the short term, believe a Widodo bonus is in order, but why?

After all, both candidates stressed the need to support domestic industries in what some outsiders call a protectionist stance and others economic nationalism. Indeed such a standpoint is almost indispensable to any successful political campaign in Indonesia today. It is reasonable to assume, however, that there will be greater room for manoeuvre when it comes to shaping real-world policies and regulations compared to the rather unforgiving campaign period. Put another way, populistic nationalism should give way to pragmatic realism once it comes to day-to-day policy-making. This is where any differences between the candidates could actually come into play.

Public policies and statements by Joko Widodo and his vice presidential candidate Jusuf Kalla could provide some clues as to where Indonesia is headed after the inauguration of the new administration in October 2014 and what it might mean for trade and investment.

A modest victor

Unlike most of Indonesia's political elite, Jokowi, as Joko Widodo is popularly known, hails from a humble background. His mayorship in Surakarta was characterised by a consensual and hands-on approach to solving numerous problems and earned him accolades at home and abroad for improving bureaucracy and tackling corruption.

Unannounced visits to check on the performance of public officials and mingling with the people to personally inspect and discuss issues on the ground have become Widodo's trademark. His unassuming style as a political leader and his modest personal character go a long way to explaining his immense popularity. However, some have questioned whether Widodo's down-to-earth approach to politics is viable or at all helpful for the top job in the country, since leading a nation of a quarter billion people requires delegating most tasks to lower levels of administration.

Be that as it may, Widodo's supporters point to his personal integrity and his achievements in Surakarta and Jakarta as evidence of his ability and worthiness to move the country forward. Indeed his merits in tackling graft and cutting red tape point to qualities that are needed to address what Indonesians and foreign investors consider to be the most pressing issues. Solving these systemic problems is widely seen as the key to effectively tackle infrastructure bottlenecks, educational deficiencies, the lack of skilled labour and other concerns.

What the press say

Promise of bureaucratic reform: According to a story published by Reuters on 5th June 2014, Widodo told investors that he would “pursue market-friendly policies” and “make bureaucratic reform and infrastructure-building his priorities.” The news agency quoted Widodo saying before a crowd of domestic and foreign investors that “investors should be given enough room to broaden their investments.” The event, held on the day the presidential campaign officially began, was the first time Widodo presented his economic programme in public. By contrast, the same story suggested that Prabowo was seen as “presenting a more nationalistic vision of the Indonesian economy.” Widodo's proposal to simplify bureaucratic procedures was welcomed by the chairman of the Indonesian Employers Association, Sofjan Wanandi. “He is saying exactly what we need,” Wanandi was quoted as saying in the same article. “Cut all the red tape and lower the high costs like logistics to make [Indonesian] products more competitive. We hope he wins so he can implement these ideas.” Outlining his economic strategy to members of the Indonesian Chamber of Commerce and Industry (Kadin), Widodo again promised to remove regulations that were not pro-businesses and pro-investment, the Jakarta Globe reported on 22nd June 2014.

Assessment: Widodo's successful implementation of bureaucratic reform at the local and provincial level lends credence to his promise of improving public administration, even though as president of the republic he will need to learn to work from the top down as opposed to the down-to-earth style he knows best.

Promise to expedite infrastructure projects: Infrastructural deficiencies impede the global competitiveness of Indonesian manufacturing and agricultural products and the country's overall economic advancement. The 'Jokowi-JK' duo has promised to target the construction of 2,000 kilometres of roads nationwide, 10 new airports, 10 ports and 10 industrial estates, based on their vision and mission filed to the elections commission as a registration requirement.

Assessment: The outgoing administration of President Susilo Bambang Yudhoyono deserves a fair amount of credit for supporting infrastructure development, notably by improving legislation on land acquisition and public-private partnerships (PPP) (See An Update on Indonesia’s Land Acquisition Law). Whether Widodo's plans are a step up on what is already planned in the long-term development roadmap (MP3EI), is impossible to ascertain since no time frame has been provided. However, the fact that Widodo's current deputy governor in Jakarta, Basuki Tjahaja Purnama, will automatically succeed him as governor, should help create a smooth working relationship between the central government and the Jakarta administration, since the two are considered an effective team. This could prove vital when it comes to cooperating on infrastructure projects in and around the capital, which affect both the national and provincial level.

Promise to improve education and health services: Antara on 18th June 2014 carried a story reading that the 'Jokowi-JK' duo had a programme “to improve the quality of Indonesian human resources.” The news agency also wrote that the president-elect would focus on social insurance programmes to expand a health card scheme he had already implemented as governor of Jakarta (See Indonesia’s Healthcare Sector). Similarly, in an interview with Channel News Asia published on 1st July 2014, Widodo, vowed to concentrate on improving education and health services. This would also be in line with the party that nominated him, the Indonesian Democratic Party of Struggle (PDI-P). PDI-P tends to promote a centre-left agenda, though it must be noted that political platforms in Indonesia are generally much less clear-cut along party lines than in most mature democracies.

Assessment: As governor, Widodo demonstrated his commitment to improve access to free education and health services, so it is fair to expect him to try and pursue these policies also nationwide. Free education is already officially available, though the quality is often left wanting and extra charges for studying materials, transportation and special activities apply. A national healthcare system is already on the books, but Widodo may seek to speed up its implementation or the extent of coverage.

Promise to phase out fuel subsidies: Widodo has provided no specifics on his strategy to address fuel subsidies, which consume a significant part of state budget resources that economists say could be put to much better use elsewhere. He seems, however, intent on tackling the issue. “We’re facing a fiscal time bomb,” Fauzi Ichsan, head of Widodo’s banking and finance advisory team, told Reuters. “Among other options; [Widodo] is considering gradually raising fuel prices and phasing out subsidies over the next four years.”

Assessment: Given the slow progress the Yudhoyono government has made on the sensitive issue, four years sounds like a steep order, particularly in light of the fact that Widodo may have difficulty putting together a parliamentary majority for raising fuel prices. In any case, the intention will be welcomed by investors concerned about Indonesia's macroeconomic direction, despite the temporary inflationary effect of higher transportation costs.

Plan to spur agricultural and SME productivity: Agricultural development and support for small and medium sized enterprises (SMEs) appears to be close to his heart for Joko Widodo's, whose aforementioned vision and mission programme includes a plan to “[develop] the agricultural sector by improving the irrigation network, which will cover 3 million hectares of rice fields, with 1 million hectares being outside Java.” The same programme, according to the Jakarta Post, also demands an increase in agriculture and industry-related research, an end to conversion of agricultural land and the creation of a bank for farmers and small businesses.

Assessment: Supporting regional development through agriculture and small business fits within Widodo's pledge to alleviate poverty and support inclusive prosperity across the country. Given his own background as a local businessman, this commitment should be more than lip service.

No clear prospects on improvements in oil and gas industry: Recognising “uncertainty, which led to a reduction in investment and exploration” in the oil and gas sector, Widodo and Kalla plan to revise the Oil and Gas Law, according to the programme they submitted to the election commission. The intention is to “improve” the sector's management, aimed at “developing national capacity and to provide permanent legal certainty.” The pair also proposed more flexible fiscal incentives for the oil and gas sector, which would be based on exploration difficulty and development area (See Indonesia’s Oil and Gas Sector – Upstream Challenges). An overhaul in the administration of licenses for new investment in the sector is also proposed.

Assessment: Barring any specifics on what the new legislation may entail, it is impossible to assess their effect on investment. Incentives for exploration and development, in fact, are already handled quite flexibly, but this precisely is one element creating the very uncertainty the candidate pair said it wanted to eliminate. In the same document, however, 'Jokowi-JK' promise to cut energy imports by promoting exploration at home. Given the tenacious decline in output over the past years, this will require a new regulatory and institutional setup that amounts to more than window dressing.

Little change seen in mining sector: Little change should be expected with regards to mining sector policies, which have been strongly criticised by investors. In their programme, Widodo and Kalla, according to the Jakarta Post, “proposed to maintain the current policy that focuses on downstream processing and uphold the ban on raw mineral exports.” The pair plans, however, to strengthen the authority of the coordinating economic minister in managing the resources, which could point to greater centralization of licensing procedures.

Assessment: The delegation of powers to the local level after the downfall of the Suharto regime is seen as one reason for rampant graft in the mining sector. Reversing the process of devolution by recouping decision authority at the central government level could in theory reduce corruption and bureaucratic hassle at the same time, but attempting this will require overcoming staunch resistance from vested interests.

Softer tone expected in disputes with foreign-controlled miners: In a bitter stand-off over contract obligations between the government and US-based Newmont Mining Corp, the new administration may chose a softer tone. Reuters on 16th July 2014 cited advisers to Widodo saying that they would use a less confrontational strategy in dealing with Newmont, after the company had decided to take the case to international arbitration. "We think later we will establish healthy communications and sit down together," Darmawan Prasodjo, senior energy advisor to the Widodo team, told Reuters in response to questions on how the president-elect would handle the dispute. "The spirit of the next government if Jokowi becomes president will be different to the spirit of the current government" he said, adding that Widodo would settle the dispute together with stakeholders.

Assessment: While unlikely to yield any tangible results, a softer tone may be a first step to improving a badly-bruised investment climate in the sector. However, Bisnis.com in a story dated 25th July 2014 cautioned that giving ground to foreign mining companies could be politically difficult for Widodo, since his future vice president appeared to take a tougher line.

Protectionist trade policies here to stay: The vision and mission document provides little hope for better trade relations in post-Yudhoyono Indonesia. In fact, the declared intention to “reduce the impact of globalization, regional economic integration and free trade” rings outright protectionist, albeit offering no details as to what this might entail.

Assessment: It must be noted, that this programme was submitted during the electoral campaign in a climate of public opinion where openly propagating greater free trade would be political suicide. That said, it is unlikely that restrictive rules on imports will become much less restrictive anytime soon.

Conclusions

Higher spending on education and health and a focus on social equality points to greater public spending and hence higher taxes. But it also points to raising lower and middle class purchasing power, which should support the consumer goods industry and the retail sector, particularly outside the main urban centres. Businesses operating in the education and health sector may stand to benefit in the medium to long term. Manufacturing businesses might be subjected to higher taxation, which could be offset to some degree by lower logistics costs thanks to improving infrastructure. SME businesses and farmers would likely receive additional support and better access to funding.

Protectionist trade policies are not likely to change from within, but Indonesia's obligations under multilateral trade agreements will make some non-tariff trade barriers increasingly hard to defend amid deepening regional integration.

Widodo has successfully portrayed himself as a representative of the people rather than any specific political party or coalition. Ironically, this may become his greatest weakness when he seeks to assemble parliamentary majorities on contentious issues. Political wrangling could throw a spanner in the works of his plan to forcefully cut red tape. On the bright side, Widodo's new government is seen as a clean slate, a chance to break with established ties to ruling elites, many of which date back to the country's autocratic past. This, along with Widodo's image of being tough on corruption and bureaucratic inertia – an image that survived a rough campaign period as opponents found no grounds to attack the candidate on this front – should positively impact Indonesia's general investment climate.

Global Business Guide Indonesia - 2014

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