As one of the largest emerging markets in Southeast Asia, Indonesia has been at the forefront of investments in the region. It is an archipelago consisting of 17,508 islands that rest on the Malacca Straits and South China Sea, both of which are regional hubs for trade.
However, the current political, security, and socioeconomic paradigms capture risks and uncertainties that affect the investment climate of the country. The history of authoritarianism and elitist politics were trumped with the arrival of President Joko Widodo, known as Jokowi, who recently secured strong approval from the coalition. Besides a thaw in coalition politics and reforms in the crackdown on corruption, there are significant risk factors posed by regional dynamics in the region with a growing bubble in the banking sector that does not seem promising.
Even though growth projections remain positive for the upcoming year, the investment climate in the country remains somewhat stagnant with manufacturing industry taking a dip and a slump in tourism. 2018 will prove to be a significant year as 171 administrative regions will simultaneously hold gubernatorial and mayoral elections. To understand the risks posed by all of these different factors, it is important examine them all individually alongside some key indicators, beginning with the domestic climate of the country.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Indonesia is a resource rich country which initially grew under Dutch colonial rule. Under Sukarno’s leadership following a four-year guerilla war with support from the Japanese, the Dutch granted independence to Indonesia in 1949. In 1965, coups and vigilante killings of communists and other leftists left the country torn, leading to the emergence of General Suharto taking power in 1967.
What followed were over three decades years of authoritarian politics with a closely aligned military involved in corrupt political and economic practices. During Suharto’s rule, Indonesia invaded East Timor and incorporated West Papua into Indonesia. The late half of the 1990s saw the Asian Financial Crisis, which resulted from bouts of currency speculation, plummeting the value of the Indonesian Rupiah. By 1998, protests toppled the Suharto regime followed by free elections in 1999.
After Suharto’s fall, East Timor gained independence (and in 2002 changed its name to Timor-Leste and admitted to the United Nations). Although the era of authoritarianism passed, the administrations of Abdurrahman Wahid and Megawati Sukarnoputri (Indonesia’s 4th and 5th presidents, respectively) were dogged with corruption scandals.
The following years saw Susilo Bambang Yudhoyono come into power through direct presidential elections, and he he enacted some anti-corruption laws and decentralization reforms. Even as corruption declined, the country continued to see clashes. Foreign copper and gold mines saw protests and separatist movements crippled the Aceh until finally peace deals were signed to give the region relative autonomy. Once Jokowi took power, he pushed forward anti-corruption laws, strengthening the rule of law and easing red tape barriers to investment. However, the current political climate of the country still presents a risk.
Indonesia pushes forward with the slogan of “Unity in Diversity” as it houses many diverse ethnic groups and religions. The country has a long history of separatist movements, be it Timor-Leste or more recently in Papua. The divergent ethnic groups in the amalgam of islands have created fractured identities that have been a source of conflict. After the decentralization reforms were enacted due to ethnic and geographical issues, governance was relegated to the individual provinces.
From the time of the Suharto regime, the military’s alignment with the political elite has been a source of dismay for the population. The Indonesian Military’s (TNI) has continued to fight separatist movements in West Papua and Makaum, which came on the heels of a yearlong courtship of Jokowi. More recently, West Papua independence campaigners gathered a staggering 1.8 million signatures on a petition that called for a free vote on independence. The increase in clashes between separatist groups and the government is a great source of risk for the country. At the same time, ethnic conflicts have manifested themselves in the major cities as well with the growing discontent with Chinese and non-Muslim groups.
Not only is Indonesia susceptible to fractured ethnic identities, but it also contains very diverse religious groups. It is also the world’s largest Muslim-majority nation. The role of Islam has manifested itself in the politics and economics of the country as well. Aceh, for example, instituted Sharia post-decentralization. The formation of a Sharia police has resulted in strict punishments that are largely viewed as dangerous in the context of a democratic country. Religious factions have sought to stymie the growth of many minority communities along the islands, including Christians and Shia Muslims. Separatist movements coupled with ethnic divides in the region are likely to serve as a further source of conflict in the region.
Terrorist Activities and Returning Foreign Fighters
The presence of terrorist groups including ISIS, al-Qaeda, and Jemaah-Islamiyah add another layer to the nature of instability in the region. Reports have approximated that close to 500 Indonesian foreign fighters were believed to be in Syria as of late 2017. After the increased presence of ISIS in the Philippines, Indonesia has ramped up its counterterrorism program in the hopes of keeping a lid on terrorist activities within its borders. Extremists from the Philippines pose another risk as the borders between the two island nations are rather porous; fighters could easily circumvent immigration controls and enter Indonesia. The critical challenge for the Indonesian government will be to curb extremist activities while rehabilitating returning foreign fighters.
Upcoming Elections and Identity Politics
The impending elections of 2018 and 2019 are likely to pose significant risks for the country as ethnicity and religion could play a key role. The gubernatorial and mayoral elections set for 2018 are likely to witness a play on religious and ethnic sentiments. In West Java, Ridwan Kamil, who was touted as the leading candidate by the Muslim conservatives, was deemed a “lesser Muslim” following his open support for Jokowi. It is possible that the president himself might face similar challenges during his re-election.
The more concerning aspect remains the espousing of religious rhetoric with respect to candidates’ suitability for office. Following the sentencing of Jakarta’s governor Basuki Tjahaja Purnama (known as Ahok) for alleged religious remarks, it is apparent that religion in some way will play a part in the country’s elections. As religious rhetoric increases, there is a stark possibility that sectarian divides will deepen and violence is likely to follow.
The Youth Bulge and Lack of Infrastructure Development
After the highly centralized and corrupt Suharto regime that ruled the country for nearly 30 years beginning in the 1960s, Indonesians sought to have more of a say in their governance. Ultimately, decentralization reforms did not provide the type of economic development that the country needed in its rural areas. Indonesia has continued to face a lack of technical and vocational training despite the growing youth bulge.
Unemployment and underemployment rates among the youth (15-24 years) are 22..6 percent indicating a need for more education and soft infrastructure development programs. Without critical education and training programs, it is hard for the nearly 60 million youth to find gainful employment. Given the general distance of the islands from one another, interconnectivity and communication has been lacking. Though Jokowi has promised infrastructure development and investment throughout the country, many of the proposed projects are big ticket items that may only provide temporary relief while draining the overall budget.
In the lead up to the Asian Games this coming year, the country had allocated $411 million to the infrastructure development budget. Of the country’s $156 billion budget for this year, over 9 percent has been committed to infrastructure development. In addition, the infrastructure development projects contain components that provide poverty reduction and relief programs.
While the investment in infrastructure is a positive sign, it is important to note that some infrastructure projects, like the ones related to the Asian Games, are only likely to provide temporary economic growth. Should infrastructure costs related to the Asian Games ramp up in the months preceding the game, it would take away from essential infrastructure needed by the country.
The Deepening Effects of Climate Change
A critical risk that the Indonesian government will have to tackle head on is the effects of climate change. In the past year, Indonesia has witnessed multiple climate disasters, recording 2,341 natural disasters in 2017 alone. Reports have indicated that the Java Sea is rising and as weather conditions become more extreme, Jakarta appears to be sinking faster than any other large city in the world. In 2014, 2.6 million people had been displaced as a result of natural disasters.
Every year, with the number of climate related disasters increasing, Indonesians will see mass displacements, increasing climate refugees, destruction of infrastructure and overall disruption in the livelihoods of the Indonesian people. These are all factors that must be addressed by the government as they will most definitely pose a socioeconomic burden on the country’s economy.
Indonesia is one of the riskier markets in Southeast Asia, primarily due to its domestic dissonance. The political risks are significant with challenges to security, infrastructure, and increasing employment throughout. These political factors will continue to bog down Indonesia’s growth unless they are remedied.
2018 will prove to be a significant year in Indonesian politics with various issues in flux. Even though the Indonesian economy presents a stable outlook, the political landscape of the country paints a bleak picture. The Indonesian government might be able to achieve their economic growth targets, but unless they address some of these core issues domestically, the country’s growth will be met with multiple obstacles in the near future.
Aishwarya Gupta is an Analyst at Morgan Stanley with a Master of Science in Global Affairs from New York University. She has previously worked with UN Women, Advanced Energy Group, UN Security Council’s Counter Terrorism Executive Directorate and various other organizations.
Ossama Ayesh is an Analyst at JP Morgan with a Master of Science in Global Affairs from New York University. He has worked with various international firms and organizations, including Advanced Energy Group, Eurasia Group and the UN Security Council’s Counter Terrorism Executive Directorate.