Since 1998, Indonesia has become one of the most dynamic and successful democracies in Southeast Asia today. Though it has navigated the global financial crises of the past five years relatively unscathed, infrastructure bottlenecks and regulatory hurdles have held back the country’s economic potential. How will the upcoming parliamentary and presidential elections impact the Indonesian economy and the companies operating in it?
One observer has forecast that Indonesia’s benchmark stock index will surge by 20 per cent by year-end as election spending supports consumer and media companies.
Challenges for Indonesia
Even though high expectations are being placed on the upcoming election as being a catalyst for growth, it is vital to understand the challenges that the incoming government will face.
1. Corruption
2. Mining laws
What lies ahead?
A third of Indonesia’s 186 million registered voters are between the ages of 17 to 30 – with a staggering 21 million voting for the first time.
Indonesia may become the world’s 7th largest economy by 2030. A growing young population, bountiful natural resources along with an expanding consumer base will help sustain growth.
Indonesia’s 2014 elections have been touted by some observers as the country’s most important since 1955. What is at stake?
1. Economic growth
Elections do have the ability to kick-start growth by boosting business and consumer confidence in ways that defy normal economic calculations. Witness the surge in confidence that accompanied the election victory of Japan’s LDP under Shinzo Abe in December 2012.
Among the MINT (Mexico, Indonesia, Nigeria, Turkey) high-potential countries, Indonesia is set to lead with a 22% increase in the number of millionaires this year – individuals with net assets of USD1 million or more, excluding their primary residence.
The 2014 elections will set the stage for more growth. 6,000 legislative candidates will battle it out this year. All seats in the lower House or DPR and the upper House or DPD are up for election in April 2014. Electoral expenditure is expected to reach at least USD1 billion; resulting in a significant boost to spending in Indonesia’s economy. Furthermore, elections can be a positive factor for the market. One observer has forecasted that Indonesia’s benchmark stock index will surge by 20 per cent by year-end as election spending supports consumer and media companies.
One observer has forecast that Indonesia’s benchmark stock index will surge by 20 per cent by year-end as election spending supports consumer and media companies.
2. Social change
The elections will witness a total of 186 million people being eligible to vote, with one third of them between the ages of 17 and 30. Voter turnout is expected to exceed the level of 70% seen in 2009. Needless to say, nine out of ten online users in Indonesia are active on social media as compared to the US – where it is seven out of ten as of 2013. As voter demographics continue to change, we can expect the political landscape to evolve, to align better with the younger, more internet-savvy voters of the future.
For instance, during the 2012 Jakarta mayoral election, candidate Joko Wikodo built up his social media presence through accounts on Twitter and Facebook as well as YouTube – reaching out to millions. Technology and social media are already playing a vital role in Indonesia’s political process. Future political campaigns may rely more on internet-based efforts at mobilization and fund-raising, not unlike how President Obama relied on the internet to raise funds from legions of small-ticket donors in the early stages of his 2008 Presidential campaign.
Elections also influence social outcomes. In Indonesia’s young democracy, elections since 1998 are widely recognized to have slightly tilted the country in the direction of social-democracy. Social-assistance programs – initially introduced after the Asian financial crisis of 1997-98 – have helped alleviate poverty. The government aims to reduce the poverty rate down to 8 to 10 per cent in 2014 versus 11.7 per cent in September 2012. These programs are designed to provide resources, access to critical health and education services as well as promote ways to improve livelihoods through wise investments.
With elections around the corner, the government is considering introducing a smart card as a basis for delivering and monitoring these programs. All of this has impacted business profoundly – enabling banks and telcos to address “poorer-but-getting-more-affluent” consumers in their marketing strategies, for example.
3. Institutional reform
Anti-corruption campaigns are an immensely popular cause in Indonesia, as they are in China and India. Electoral democracy has clearly played a role in building anti-corruption momentum, as politicians seek to burnish their anti-corruption credentials.
Public participation in the 2009 elections fell to 70.9 per cent in comparison to 84 per cent in 2004. The decline was attributed to corruption cases involving local and central government legislators. 73 legislators were involved in corruption cases from 2007 to 2013. More than 90 per cent of these legislators are incumbents for the 2014 election.
This looks poised to change. The Corruption Eradication Commission (KPK) – established by Indonesia’s government in 2002 – recently launched the ‘Choose the Honest’ campaign in collaboration with beauty pageant winner Elvira Devinamira. The agency aims to raise awareness amongst voters and persuade them to exercise their voting rights in an honest manner.
The link between anti-corruption progress and business investment is well-established. Progress in the battle against corruption is likely to nurture more investment, entrepreneurship and innovation.
Impact on business
The business climate in Indonesia is poised for change due to the impending elections.
1. Existing Businesses
Businesses in Indonesia are experiencing a slowdown due to a weakening Indonesian Rupiah against the US Dollar. This will further intensify due to the expansion of the country’s current account deficit and stronger US Dollar demand by companies to finance their overseas obligations. Exports have also dropped for 18 consecutive months for 2013, which has raised further red flags for investors.
On the other hand, consumer confidence remains intact despite inflation and uncertainty over elections. In one recent survey, the majority of respondents expected the business environment, job opportunities and incomes to rise in the next 6 months as of February 2014.
2. Investment
Weak global demand and a depreciating Rupiah have deterred investors, many of whom seem to be cautiously awaiting the election results to decide the next step. Moreover, poor infrastructure development has raised logistics costs, reducing competitiveness – especially in the manufacturing sector.
To counter this, the government recently announced the easing of restrictions on foreign ownership from December 2013 onwards. 100% foreign ownership for power plants built under a public-private partnership is now allowed.
Challenges for Indonesia
Even though high expectations are being placed on the upcoming election as being a catalyst for growth, it is vital to understand the challenges that the incoming government will face.
1. Corruption
The KPK has been at the helm of curbing corruption but it faces a difficult challenge. It has spent the last decade investigating and prosecuting high-level corruption cases, boasting a 100 per cent conviction rate. However, Indonesia is ranked 114th out of 177 countries according to Transparency International’s 2013 Corruption Perception Index. Bringing about deep, structural change on this front will take time.
2. Mining laws
New regulations could increase the cost of doing business for foreign investors in the mining industry. One of the rules requires foreign companies to divest majority control of projects within 10 years of commencing production. Another imposes a 20 per cent tax on exports of 65 unprocessed minerals and metals; inclusive of nickel, gold and tin.
On the other hand, the government views the situation differently. It perceives this as adding value to this sector by enforcing local production. It wants to further promote domestic processing by banning mineral ore exports as well. This could strengthen the state-owned manufacturing industry.
However, some local traders report that they cannot afford to build and run their own processing plants. Some 30,000 mine workers have already lost employment till date.
What lies ahead?
A third of Indonesia’s 186 million registered voters are between the ages of 17 to 30 – with a staggering 21 million voting for the first time. Indonesia’s youth could significantly influence the outcome of this election. Social media is emerging as a potential game changer, as more Indonesians become active online, giving legislator’s access to millions of voters.
A third of Indonesia’s 186 million registered voters are between the ages of 17 to 30 – with a staggering 21 million voting for the first time.
Challenges remain on the economic front – from the weakening Rupiah against the US dollar to the current uncertainty in the mining industry. The incoming government will also have to tackle the challenge of institutional reform. To paraphrase former American Secretary of State Donald Rumsfeld, the incoming President and government will have to work with the governmental bureaucracy they have, not the one they would want to have. Nevertheless, it should be recalled that the new government will inherit an economy that is still in decent shape – with respectable growth, consumer confidence and macro-economic management that has kept inflation under control.
At the time of the publication of this essay, the Jakarta Center for Strategic and International Studies has forecasted that the PDI-P party, whose candidate for the Presidency will be Jakarta Governor Joko Widodo, may garner one third of the popular vote. This could be enough to give him the Presidency with a strong showing in Parliament that would minimize reliance on other parties. What would this mean for Indonesia and for Indonesian business? Governor Widodo or “Jokowi” is well-known for impatience with corruption, a genius for urban planning and a results-oriented administrative style. Some question whether he would be able to replicate his achievements as Mayor of Solo and then Jakarta at the national level. But it is likely that an administration led by him would favour bureaucratic reform, would support SME development more strongly and would stimulate investment in infrastructure development. His symbolic appeal may also ignite popular patriotism.
Whatever the outcome, what the 2014 Indonesian elections clearly signal is that Indonesia has achieved a precious goal – attaining the status of a reasonably healthy emerging economy that is at the same time not just a vibrant democracy but also one that is capable of throwing up interesting and highly functional political options.
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