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Indonesia Politics January 2024

Indonesia: Presidential elections likely to bring policy continuity

– Prabowo Subianto is expected to emerge victorious, ensuring economic policy continuity.

– Excessive spending could weaken fiscal metrics and dent investor sentiment.

– Political gridlock and changes to major ongoing projects are factors to watch.

On 14 February, the world’s third-largest democracy will hold legislative and presidential elections. The latter will be a three-way contest between Defense Minister Prabowo Subianto, the outgoing governor of Central Java, Ganjar Pranowo, and the former governor of Jakarta, Anies Baswedan. The race sparked criticism following a controversial last-minute decision of the constitutional court that lowered the eligible age for candidates in October, allowing the eldest son of President Joko Widodo (Jokowi), Gibran Rakabuming Raka, to join the run as Prabowo’s vice-president. The pair have kept the election lead through January.

Despite his lead in the polls, Prabowo is unlikely to capture more than 50% of the vote in February. Consequently, a second round will probably take place in June 2024, before an inauguration on 20 October. Prabowo will likely win the run-off thanks to the endorsement of the highly popular President Jokowi. Prabowo’s heavily populist agenda and vastly larger campaign funds compared to Ganjar or Anies will give him a further boost.

The impact of the race will be felt even before the inauguration: The economy is set to benefit from an intense election spending boost in 2024, with an allocated budget for electoral spending of 0.4–0.5% of GDP, above the 0.1–0.2% allocated in previous general elections.

Beyond 2024, a potential Prabowo victory will likely ensure policy continuity in the post-Jokowi era and boost the domestic economy if he follows through with his policy proposals, which include a prolongation of energy subsidies, the construction of a new USD 34 billion capital city, cuts to personal income tax and wide-ranging social assistance programs. Such policies would support consumption growth during his term and alleviate the strains of high interest rates and muted commodity prices. Nevertheless, generous spending could undermine fiscal metrics and dent investor sentiment.

Ganjar’s potential election would likely have similar economic impact as his policy agenda aligns closely with that of Prabowo. However, Ganjar has placed more emphasis on anti-corruption measures and the expansion of a ‘downstreaming policy’ beyond minerals to include the forestry, agriculture and fishery sectors, which could support deeper economic diversification and boost investor sentiment.

Meanwhile, an Anies victory will produce the most tangible change in policy course. He has opposed the construction of the new capital, expressed the strictest views on public debt, proposed to tax top earners, and vowed to foster green-economy policies while maintaining pro-downstreaming policies. Such proposals have been welcomed by market analysts, who deem Anies as the best suited to run the country.

Analysts at the EIU commented on the electoral outcome:

“We anticipate that Mr Prabowo will follow Jokowi’s strategy of incorporating politicians from opposing parties into the administration. This, coupled with his commitment to continuing Jokowi’s policies […], is expected to contribute to political stability during his term. However, the drawback to this inclusive approach is potential inefficiency in policymaking.”

Goldman Sachs analysts commented on the economic impact of the elections:

“Given that the candidates are running on similar economic platforms, we think the short-term economic and market implications are limited. However, there is more policy uncertainty heading into 2025 such as discontinuation of the new capital city project and investment and attempts to loosen the fiscal deficit cap (currently at 3% of GDP), which could have meaningful implications for the bond and FX markets. We also highlight a potential downside risk to our inflation forecast in 2025 should the new government decided to scrap the 1pp VAT increase due on 1 January 2025.”

Nomura analysts wrote about the risks to the external balance:

“Domestic political uncertainty, in our view, may exacerbate external risks that are already affecting Indonesia’s balance of payments. The IDR has underperformed its regional peers recently, driven by portfolio investment outflows in part due to narrowing interest rate differentials with US interest rates and sharp FX reserve drainage, which led to relatively low adequacy ratios. […] Given the political cycle, the risk of a downtrend in FDI inflows may intensify, weakening further a key source of financing for the current account deficit.”

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