Our Opinion: 2014
Indonesian election results due
On 9th July, the Indonesian Presidential elections took place. The results will be known next week after counting almost 200 million votes. and it will be pivotal to the country’s direction.
The business community’s favourite candidate is Joko Widodo (known as ‘Jokowi’). His poll lead fell sharply in the days before the vote, unsettling Jakarta’s Composite Index.
The Economist reported last week that Jokowi (a popular governor of Jakarta) has “forged a reputation for can-do competence and clean government.” In the election campaign, he suggested he may cut fuel subsidies that have strained the government budget, and promised to improve education. Whilst his recent rhetoric has been more protectionist, it is still much more attractive to the business community than the nationalist attitude of his opponent, Prabowo Subianto.
Subianto is a former general, who is suspected of human right abuses. He plans to double the national debt to 50% of GDP and stimulate growth with borrowed money. That would frighten foreign investors. It would be particularly un-settling since Indonesia has a current account deficit that needs to be plugged with foreign money.
Tai Hui of JP Morgan Asset Management points out that the winner is unlikely to be able to deliver their programmed anyway, since he won’t have strong support in a divided Parliament.
The current government has laid solid foundations by reducing debt and inflation after the dictatorship ended in 1998. Public debt slid from 150% of GDP to 25%, and inflation is in the mid-single digits. However, the government is still seen as being more corrupt than even Egypt or Kosovo, and poor infrastructure is a major obstacle to growth.
Structural change has long been needed to improve Indonesia’s growth potential. However, healthy commodity exports and plenty of Western cash avoided an earlier crisis. However, growth is now falling so the economy needs underpinning with reducing red tape and corruption.
Indonesia will need foreign help to exploit its many assets. It has plenty of raw materials, and a young population (26% are under 15) that is expected to produce 141m middle-class consumers by 2020. Household debt is low, suggesting there is plenty of scope for consumption to grow. The economy is also well balanced, since domestic consumption provides well over half of its GDP – a powerful counter weight to weakening exports.
The market could well fall after the election result which may be a good opportunity to introduce, or increase, exposure to Indonesia in a portfolio, for those with a long-term view.