Indonesian presidential elections – the dawn of a new era

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It took a fortnight to count the 135 million votes cast, but on 22nd July the election of Joko Widoda (universally known as Jokowi) as Indonesia’s new president was confirmed, with a higher winning margin than exits polls on election night had originally predicted. Jokowi succeeds Susilo Bambang Yudhoyono (widely known as SBY) who served two terms since the fall of the Suharto dictatorship in 1998. Seen as a reformist without ties to old Indonesian elites or large corporations, Jokowi’s election is an impressive peaceful transition of power in the world’s third largest democracy.

Having won power, Jokowi’s challenge now is to show that there is real substance in his campaign message of not being corrupt but being a “man of the people” and getting things done. This will not be straightforward; there are major structural issues to be tackled, such as Indonesia’s shortcomings in infrastructure and addiction to fuel subsidies.

Nonetheless Jokowi’s election signals the start of a new era in Indonesian politics, breaking the monopoly that an elite clique previously held on power. Financial markets have reacted well (see figures 1 and 2 below) to Jokowi’s election, suggesting investors have confidence that the new president will be able to make fundamental changes at a time when there are signs Indonesian growth is slowing (Annual GDP growth slipped to 5.2 in the first quarter of 2014, the slowest in four years). Although Indonesia has been Asia’s strongest market this year (the Jakarta stock market is up 21.73% year-to-date [04/08/2014] in USD terms), whilst the IDR has strengthened to more than 5% against the dollar – some good news is already priced in.

Figure 1 – Jakarta Stock Exchange

Jakarta stock exchange composite index

Source: Bloomberg


Figure 2 – IDR-USD exchange rate

idr-usd EXCHANGE rate

Source: Bloomberg

In taking over as leader of southeast Asia’s biggest economy, Jokowi has already announced that he will only cut the country’s $21 billion fuel subsidy bill gradually, channelling the extra funds in to other programmes aimed at helping the poor. Alongside falling revenues and the lowest economic growth that the country has seen in five years, the bill for subsidised fuel accounts for 13% of all government expenditure. This has left investors increasingly keen to see a change in fiscal policy. Hence the view that subsidy reform will be an early indicator of Jokowi’s capacity as president. Furthermore, it is a problem which will have to be tackled in the near future with the World Bank’s forecast of a 2.8% budget deficit – close to Indonesia’s 3% legal limit.

Although Jokowi is openly aware of the limitations in dealing with large and inefficient bureaucracy, it is predicted that there will be some sectoral winners from his planned reform, such as transportation and construction stocks. In the past, Indonesian presidents have been reluctant to change fiscal limits in fear of alienating the middle classes. However, Jokowi has urged “a revolution to take the middle classes from being subsidy receivers to taxpayers”. His priority for an increase in foreign direct investment has also proved optimistic with investors, with his plans to attract capital by offering long-term leases on apartments for foreigners.

Only time will tell as to how successful Jokowi’s reforms will be, but we will keep you posted on progress in this new era in Indonesia’s history.

Aliyahdin Saugi

Head of Indonesian equities at BNP Paribas Investment Partners

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