Event

On 17 April, presidential and legislative elections were held together for the first time. Turnout at those peaceful elections was above a high 80% and thus higher than in 2014 (70%). According to preliminary results, incumbent President Joko Widodo would imitate his predecessor Yudhoyono by becoming Indonesia’s second democratically-elected president to win a second successive 5-year mandate. Unofficial results would give him around 54% of the vote whereas his multi-party coalition should see its majority in Parliament preserved with Jokowi’s DPR party retaining the largest number of seats. As in 2014, he would have defeated the conservative and ex-army general Prabowo Subianto whose Gerindra party could nevertheless have become the second-largest party in Parliament. The General Election Commission is due to announce final official results between 25 April and 22 May. Although Subianto declared himself the winner, alleged electoral fraud and is expected to challenge the outcome as he did in 2014, it is unlikely to hinder Jokowi’s re-election in the end. The next presidential mandate will start on 20 October.

Impact

Jokowi is set to run the world’s third-largest democracy for a second term despite lower-than-expected economic performance and a disappointing anti-corruption policy. A contributing factor for his re-election could have been his running mate choice which represented a major difference compared with the 2014 election campaign that opposed the same presidential candidates. Widodo’s deputy, Ma’ruf Amin, is indeed a conservative and respected Muslim leader heading the biggest Islamic organisation. He was picked to meet the rising importance of religion in politics which was palpable in capital Jakarta’s 2017 governor election during which the outgoing Christian governor Ahok was jailed for blasphemy. Hence Widodo opted tactically and seemingly successfully for a more resolute stance on religion to attract more conservative voters at the cost of the country’s traditionally moderate Islam.

Widodo’s second mandate with a maintained parliamentary majority would allow policy continuity. The prospect of significant structural reforms could be limited by the small majority of his fragile coalition and by less favourable external conditions. Though he failed to reach the bold 7% GDP growth target, the economy nevertheless continued to show high resilience at an average and robust 5% in 2014-2018. In the medium/long term, a slightly higher rate of 5.3% is forecasted. Also, Indonesia is expected to keep good fundamentals with among others a low public debt and moderate external debt. However, as many other economies of the region, Indonesia could be harmed by trade tensions, a slowing China and higher oil prices. The negative indirect impact via weaker commodity prices is a downside risk as natural resources (palm oil, coal, copper, etc.) account for a majority share of Indonesia’s goods exports. In a weaker global trade context, exports have been suffering over the past months while trade nationalism has resulted into import compression. The latter could curtail the current account deficit this year and withstand market pressures after they hit a volatile rupiah through capital outflows last year.

Large public infrastructure projects will remain a key policy focus and move forward to support economic activity whereas China’s economic influence will remain crucial for external demand and investments (notably in the frame of the Belt and Road Initiative). Widodo could improve the foreign-investor framework in the manufacturing and services sectors – and thus reduce its ‘Negative Investment List’ – after a decline in FDI inflows last year. The context is favourable as Indonesia, together with other Southeast Asian countries (starting from the largest recipient Vietnam), is likely to benefit from shifting Chinese manufacturing production that is hit by US tariffs. Softening his investment stance in the commodity sector is not likely to happen, though. Resource nationalism was indeed part of his populist campaign and is expected to continue in line with his first term which favoured domestic production for domestic use and local jobs. As an illustration, Indonesia announced last year that it would increase the use of biofuels as a domestic energy source. It is a way to curb fuel imports and the current account deficit, and in fine mitigate Indonesia’s persisting reliance on foreign capital inflows and vulnerability to an uncertain investor sentiment.

All in all, in spite of Indonesia’s exposure to potential external shocks at a trade and financial market level, political and macroeconomic stability are likely to translate this year into a stable rating outlook at 3/7 for Credendo’s MLT political risk.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com