President-elect Jokowi lifts Indonesia’s economic outlook

President-elect Jokowi lifts Indonesia’s economic outlook

Indonesia’s new President Joko Widodo brings a fresh face to a nation still finding its way as a global economic player. His commitment to subsidy reform and infrastructure investments could help diversify Indonesian exports, fuel economic growth, and appease the nation’s growing middle class.

The rise of Joko Widodo from furniture salesman to Governor of Jakarta and President of the world’s fourth most populous nation stands out in this year’s political news, bringing a populist reformer to the forefront of an Indonesian civil scene long dominated by military officials and the political elite.

Widodo, universally known as “Jokowi,” will be only the second democratically-elected President in Indonesia’s history, marking the first time that one popularly elected leader has cleared the way for another. His opponent, former army general Prabowo Subianto, said he would challenge the vote in the country’s constitutional court, but experts say a case would likely be dismissed given a lack of misconduct and a fairly decisive victory.

Indonesian political parties are already showing signs of moving behind the president-elect. Members of Golkar, one of the nation’s largest political parties which had initially backed Subianto, said they wouldn’t remain in a losing alliance when Widodo assumes the presidency in October. Broader support could give the new leader majority control of parliament, which often blocked initiatives of outgoing President Susilo Bambang Yudhoyono.

But parties have historically broken away from majority coalitions in the face of politically unpopular reforms. Widodo inherits a nation rattled by inadequate infrastructure, corruption, and a national fuel subsidy that eats up billions of dollars from state budgets each year. As one of the world’s leading suppliers of mineral and agricultural materials, Indonesia has suffered from falling commodities prices, increasing its trade deficit and further straining state budgets. The World Bank expects Indonesia’s economy to grow by just 5.3% this year, down from 6.5% just three years ago.

“We need to get our economy growing. To do that we must have more investment and deliver in terms of infrastructure,” Widodo told Reuters in an interview. Convincing investors to return to Indonesia, however, requires reforms that solve the unique economic challenges previous rulers have been unable to address.

Reform will clear the way for growth

Indonesia is an archipelago comprising some 13,466 islands, creating a unique infrastructural challenge for an emerging economy with a population of over 250 million. The nation lacks adequate infrastructure to accommodate a growing middle-class, leaving its roads jammed, its ports full, and its electrical grid heavily strained.

Indonesia boasts perhaps the most geographically diverse terrain in all of Asia, yet has one of the lowest ratios of road and rail distance to land area in the region. Many foreign companies, including Blackberry and Samsung, have indicated they won’t increase investment or local production until they see action on infrastructure projects.

Widodo made infrastructural investments a key talking point in the run-up to the election, bringing some hope that new bridges, roads, and ports will clear the way for greater foreign direct investment. FDI in Indonesia stands at just 3% of GDP, lagging far behind its neighbor, Singapore, at more than 20%.

But to secure funding necessary for infrastructure projects, Widodo must rein in a costly fuel subsidy regime that has strained state budgets for decades. Fuel subsidies cost the Indonesian government at least 7% of its budget since 2005, exceeding 25% of total outlays in 2009. And while subsidies are intended to help the poor, shielding them from shocks in global energy prices, the upper and middle classes receive the majority of the benefit. Some 90% of fuel subsidies went to the richest half of households in 2012.

Although Widodo has expressed commitment to reform, the stakes remain high. Recent attempts to rein in fuel subsidies led to nationwide protests, when gas prices rose some 44% in 2013. For investors, the clearest sign of a rebound in Indonesian growth will be how quickly Jokowi acts on subsidy reform.

Reining in the subsidy regime will also allow Widodo to secure investments in manufacturing and non-commodity-based industries. Commodities such as palm oil and tin have dominated Indonesia’s export base for over a decade, leaving the nation exposed to shocks and busts in commodity values.

In order to diversify Indonesia’s exports, Widodo has committed to cutting political red tape, and offer tax incentives to foreign companies. Fortunately for the President-elect, there is still enthusiasm in Indonesia’s potential. Automotive companies including Nissan and Toyota have been expanding factories in Indonesia to market to its thriving middle class, and others are likely to follow suit.

Widodo’s election has struck a positive initial note with investors as well. Foreign direct investment in Indonesia rose 7.3% in the second quarter this year, suggesting improved confidence in the Southeast Asian nation’s economic future under the new President. Singapore was the nation’s largest provider of FDI in the second quarter, followed by the UK, Malaysia, and Japan.

Jokowi provides Indonesia with a breakaway from the political elite, bringing into power a President who built his career around honesty and commitment to reform. Should he make good on his promises, Jokowi means better days ahead for Indonesia.

Categories: Asia Pacific, Politics

About Author

Rami Ayyub

Rami is an analyst with a US Defense and Space firm, where he works in strategic planning and finance for Civil and Defense programs. He holds Bachelor degrees in Finance and Classical Music from the University of Maryland, College Park.