Jokowi faces short honeymoon

Tackling fuel subsidies and appointing the right finance minister will determine Joko Widodo’s success as Indonesia’s new president. But for now, investors are upbeat.
Jokowi faces short honeymoon

Investors and sell-side analysts say they are pleased with Joko “Jokowi” Widodo’s victory in this week’s presidential elections in Indonesia, but the urgent work of tackling budget issues means he will have little time to bask.

Joko is well regarded as the mayor of Solo and the governor of Jakarta, but he has no experience at the national level, let alone abroad. He is likely to get a quick education, given the likelihood of the US Federal Reserve raising interest rates in 2015.

Indonesia still suffers from a current account deficit, leaving it vulnerable to outflows of global investment capital. Joko’s administration has a short window to act to win investors’ confidence.

“Given the dangling Sword of Damocles that is the potential Fed fund normalisation, the issue of the current account gap will start to feel very urgent rather soon,” said Wellian Wiranto, economist at OCBC in Singapore in a report yesterday.

Top of the list is tackling ruinous fuel subsidies, which cost the government around $20 billion a year, or around 3.5% of GDP – far more than the 1.8% of GDP that gets spent on infrastructure, said Lim Soo Hai, a Hong Kong-based fund manager at Baring Asset Management.

During the campaign, Joko said he favoured phasing these out over a four-year period. Other priorities include bureaucratic reform, to make the civil administration work better and more cleanly at all levels throughout the archipelago; and spending more on infrastructure while cutting spending on government services, notably civil servants.

Experienced political operators would struggle to achieve these goals. Can Joko succeed using his populist touch and clean reputation?

“Just like [US president] Barack Obama, his image helped him win, but now he will have to face the reality of governing,” said Hario Soeprobo, who runs First State Investment’s Indonesia business in Jakarta. “He is expected to bring a fresh take on important things.”

Cabinet clues
One signal of Joko’s intent will be the announcement of his cabinet, expected in early October before his October 20 inauguration. Investors are eager to know who will be appointed finance minister. One possibility is Jusuf Kalla, who ran as Joko’s running mate and is an experienced hand.

Kalla was once a businessman and he holds a degree from Insead. He served as trade minister under the presidency of Abdurrahman Wahid, and as vice president under the incumbent Susilo Bambang Yudhoyono.

Another possibility is Faisal Basri, an economist at the University of Indonesia and outspoken supporter of Joko (he lost a campaign to be Jakarta’s governor to Joko). Faisal has highlighted the president-elect’s support for inclusive economic growth, such as supporting infrastructure around farmers and fishermen. That is in contrast to the turbo-charged GDP growth that Joko’s rival, Prabowo Subianto, promised in the form of Chinese-style, fuel-guzzling power projects.

Indeed, the most significant aspect of Joko’s win is a move away from the sort of top-down dirigisme favoured by the dictator Suharto. The election gave Indonesians a stark choice between returning to strongman rule versus consolidating the country’s emerging democracy and fostering a more decentralised, pluralistic nation.

Prabowo was seen as championing the legacy of the so-called Berkeley Mafia, the cadre of US and US-trained economists who guided Suharto’s economic policy during the 1960s and 1970s. While some view this as pro-business (Indonesia did see the emergence of its middle class under the dictator), it was also corrupt. Joko, in contrast, represents a style focused on managerial competence, clean governance and a level playing field.

“If you look at his track record in Solo and Jakarta, Joko has proven to be quite an effective leader,” said Barings' Lim. “He represents a shift away from the old guard.”

The markets clearly like Joko; domestic stocks have risen 3% in dollar terms since polling began on July 8, taking year-to-date gains to 29% for 2014. They climbed 8% this month alone, suggesting investors have been pricing in a likely victory for the ex-Jakarta governor, Lim said.

Barings has increased its equity exposure to Indonesia over recent months, he added. That is in keeping with market consensus. Foreign investors have turned more positive on the country this year, pouring $4.8 billion into domestic equities year-to-date and $1 billion this month to date, according to Bloomberg. That follows net foreign investors outflows of $1.8 billion for 2013.

A strengthening currency this year has helped, with the rupiah appreciating 5.8% against the dollar so far in 2014.

That puts Indonesia in a position to make the politically tough cuts to fuel subsidies, assuming Joko and his team move swiftly once they take power. The long-term potential for Indonesian equities is positive thanks to its young population, growing consumption power and, fingers crossed, a reformist administration, noted Lim. “What we need is the right leadership to put through some of the policies promised."

What about Prabowo?
The fly in the ointment could be Prabowo, who lost the July 9 election by some 8.5 million votes. Joko did not achieve a landslide victory, but the six-percentage-point margin looks solid enough to withstand any legal challenge.

Prabowo, a mercurial figure, may go to the Supreme Court, but he will have to actually then prove his allegations of fraud – allegations that no-one other than his hardcore supporters have echoed.

Although he is a dangerous adversary, early signs point to Prabowo becoming irrelevant. His own vice president has gone quiet, while coalition leaders that supported Prabowo face questions among their parties as to why they backed the wrong horse – among them Aburizul Bakrie, a former Suharto crony and today head of the political party Golkar. Some of these parties may switch sides and support Joko in parliament.

It is the vast money poured into the Prabowo campaign by Bakrie and other Suharto-era tycoons that fuelled the ex-general’s attempt to knock Joko out. That largesse, plus a reliance on dishonourable smear tactics against Joko, nearly worked. But most Indonesians voted for something different.

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