Jokowi: A Nation (and Market) Picks a Favorite


Indonesians may be awaiting confirmation of their next president, but the financial markets have long since decided on their favorite. Can frontrunner Joko Widodo, known as Jokowi, deliver on their expectations and ensure the world’s fourth-most populous nation achieves its apparent destiny as one of Asia’s powerhouses

On Wednesday, Jokowi signaled he was open to other political parties, including the ruling Democratic Party, joining his coalition government should he be confirmed as the winner of the July 9 poll. Adding allies to Jokowi’s four-party coalition led by his Indonesian Democratic Party of Struggle (PDI-P) would help ensure passage of new laws in parliament, where Jokowi’s rival, Prabowo Subianto, is part of a coalition that currently holds around 60 percent of the seats.

According to Bloomberg News, the former Jakarta governor was leading the ex-general Prabowo by around 53 to 47 percent of the 123 million votes counted, among the 190 million eligible voters in Asia’s second-largest democracy. Official results are due by July 22, with a margin above 3 percent seen sufficient to counter any potential constitutional challenge from Prabowo.

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Yet should Prabowo contest the outcome, Indonesians could be forced to wait until August 24 for a final court ruling. The new president will be inaugurated on October 20 for a five-year term, replacing outgoing President Susilo Bambang Yudhoyono.

However, financial markets have already factored in a Jokowi victory. On Wednesday, the benchmark Jakarta Composite Index closed at its highest level since May 2013, while the Indonesian rupiah has gained around 1.6 percent in July on investor hopes for greater transparency.

Foreign investors have bought nearly $7 billion worth of Indonesian shares in 2014, exceeding the annual record, on expectations of deregulation in areas such as banking, construction and infrastructure. According to ANZ-Roy Morgan Research, Indonesian consumer confidence has also risen strongly since the Jokowi nomination, with a Prabowo challenge seen threatening sentiment and spending.

‘Breath Of Fresh Air’

Nevertheless, in a July 3 report, ANZ Research warned foreign investors not to get too excited by Jokowi.

“We believe markets may have been too enamoured with a Jokowi victory and do note some inconsistencies in his stance on foreign direct investment (particularly regarding any potential constraints on imported technology and capital),” the bank said.

While ANZ noted investor sentiment that Jokowi would be a “breath of fresh air,” it described the contest as one between a “protectionist and a nationalist.”

“[Jokowi] is perceived to be a reformist and would likely engineer a slowdown in growth over the next few years to help transition the economy to a higher potential rate over the medium to long term. We believe that this would entail satisfaction with growth outturns below 6 percent for a couple years before a shift higher, likely to over 7 percent, as potential growth lifts after several years of supply-side reform,” ANZ said.

“Infrastructure development, fostering the agricultural sector, increased energy independence, and a greater focus on import substitution are high on his economic agenda,” it added, noting that Prabowo’s policies “are likely to represent more of the status quo.”

Indonesia spent an “unsustainable” $36 billion on subsidies last year, around half on fuel, and both candidates have pledged to rationalize prices. According to ANZ, Jokowi’s preference for outright price hikes would lead to a sharp inflation rise in the short term that would ease later, while Prabowo’s plan for tiered pricing would keep inflation “chronically higher” for longer.

Jokowi is also seen as more of a fiscal hawk than Prabowo, with the former governor expected to rationalize taxation and curb the nation’s debt. By contrast, Prabowo has noted that $42 billion is “unaccounted for” every year and could seek to extract more tax revenue from foreign companies, while also accommodating a rise in the debt level.

Although both candidates have made protectionist statements toward foreign investment, ANZ noted that their “hard line may become more fungible” when elected, given their plans for increased infrastructure spending, technology transfers and the fact that foreigners already own 36 percent of government debt.

Yet while ANZ said Jokowi “appears to be a little more foreign investor friendly,” other analysts have expressed caution.

“The greatest uncertainty about [Jokowi] is the extent to which he will be able to translate his undoubted popularity and grassroots appeal into an ability to govern. He will need to get reform initiatives past a fundamentally nationalist and increasingly assertive legislature, and his own populist nationalist PDI-P party,” ratings agency Standard & Poors (S&P) said.

The election outcome is expected to have little impact on Indonesia’s BB+ sovereign credit rating, the agency said.

“We expect reform progress to be slow no matter who is elected. Any boost to policymaking and growth prospects is likely to be insufficient to strengthen the sovereign credit rating on Indonesia,” observed S&P credit analyst Agost Bernard.

Capital Economics Asia economist Gareth Leather told the Australian Financial Review that it would be difficult to jump-start growth, although he suggested Jokowi’s policies could help.

“A clampdown on corruption, progress on improving infrastructure and a relaxation of the country’s inflexible labor market would undoubtedly go some way to restoring confidence and setting the country on the right path,” he said.

Ironically, Jokowi’s chances of securing a parliamentary majority to push through reform could be aided by Golkar, the second-largest party, associated with former dictator Suharto. While currently a key member of the Prabowo camp, Golkar officials have indicated their distaste for opposition, having been in government for the past decade.

A deal could be done with Jokowi’s vice presidential running mate, Jusuf Kalla, a former Golkar chairman, which would give Jokowi’s coalition 53 percent of parliamentary seats.

Yet should Jokowi triumph, he will face reforming an inefficient subsidy structure, while maintaining the confidence of an overwhelmingly young population. In 2013, around 54 percent of Indonesians were aged below 25 years, with little memory of past hardships.

In its April 2014 outlook, the International Monetary Fund projected Indonesia’s economy would slow to 5.4 percent GDP growth in 2014, down from its previous level of around 6 percent of the past three years, due to higher inflation and rising interest rates.

The Asian Development Bank has also noted that despite “significant strides in terms of reducing poverty…[like elsewhere in the region] Indonesia has seen a steady increase in its rates of inequality,” with its Gini coefficient rising from 31 in 1999 to 41 in 2011.

While Pacific Money has previously noted Indonesia’s potential as one of the “next BRICs,” the likely winner of this year’s presidential poll cannot expect an easy ride. But for a man raised in a riverbank slum who has risen from successful businessman to political leader, Jokowi has seen off bigger challenges.

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