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Indonesia Politics April 2019

Indonesia: Incumbent Joko Widodo favorite to retain the presidency, signaling policy continuity

On 17 April Indonesian voters head to the polls to elect a new president and parliament. Incumbent Joko Widodo, often referred to as Jokowi, is likely to clinch victory and should be able to command a majority in parliament. This should mean a broad continuation of past policies, including an infrastructure push, and measures to boost economic competitiveness. Prabowo Subianto, a former military general, is the main challenger, whose victory could spell volatility for the rupiah and equity markets in the near-term due to the greater political uncertainty it would entail. Regardless of the outcome, the economy is likely to maintain a strong growth trajectory, while monetary policy is unlikely to be significantly affected by the outcome of the vote.

Most polls give Jokowi a significant lead over Prabowo, although the gap appears to have narrowed recently and Prabowo’s team claim internal polling shows their candidate is in fact in the lead. If Jokowi emerges victorious, he is likely to press on with public construction projects and continue efforts to enhance the business environment, which have seen the country climb rapidly in the World Bank’s Ease of Doing Business rankings since 2014. Jokowi’s manifesto also includes measures to prepare the economy for looming technological change and improve digital infrastructure. On the fiscal front, he aims to reduce the budget deficit and foreign ownership of rupiah-denominated debt to strengthen the fiscal position. Given that this term would be Jokowi’s last due to constitutional restraints, this could add impetus to reform.

Analysts at Goldman Sachs noted that they “would expect a Jokowi administration to renew its efforts on infrastructure development after pausing on some projects this year due to current account concerns”. Expanding upon this point, they noted: “Residual fuel subsidies would likely be removed in the second half of this year, pushing inflation slightly higher.”

A win for Prabowo could cause an immediate negative knee-jerk reaction in currency and equity markets, followed by a potential period of policy inaction. After all, the new president would only assume office in October, while it is unclear whether the former general would have a stable majority in parliament given that parties backing him currently represent only around 40% of seats. That said, Prabowo’s program bears some similarities to Jokowi’s, which could ease the passage of reforms. He is also advocating a strong focus on infrastructure spending, state ownership of key natural resources and boosting domestic energy production for instance. Fiscally, Prabowo leans to the right. For example, he proposes significant income and corporate tax cuts, and promises to use government debt only to finance infrastructure projects. However, it is not immediately apparent how these apparently contradictory aims could be reconciled, especially given the candidate’s pledge to boost subsidies.

The impact of a Prabowo presidency on inflation is unclear. As Nicholas Mapa, an economist at ING said: “One factor that has helped inflation settle at the lower-end of the 2.5-4.5% target has been the ability of Indonesia to import important grains which has ensured adequate supply domestically, something that Prabowo has vowed to cancel should he take power. On the other hand, Prabowo has also campaigned on a promise to reinstate fuel subsidies and lowering reliance on imported fuel via higher biofuel content, something that would also affect the inflation dynamic should he wrest the presidency from Jokowi.”

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