Short Insight – Indonesia: A second term for Jokowi

by: Arjen van Dijkhuizen

  • Unofficial results suggest President Jokowi gained second term
  • A Jokowi presidency is good for policy continuity
  • Economic growth stable, slight uptick expected
  • Low inflation leaves some room for supportive monetary policy
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1. Unofficial results suggest President Jokowi gained second term

On Wednesday 17 April, for the first time in history, Indonesia held presidential and parliamentary elections simultaneously. In the world’s largest Muslim democracy (almost 200 mln eligible voters), the presidential elections were a battle between a moderate (Jokowi) and a hardline Muslim candidate. As in 2014, the incumbent Joko Widodo (Jokowi) faced the conservative former general Prabowo Subianto, leader of the Great Indonesia Movement Party (Gerindra). While official results will only be announced in May, unofficial results point to a clear victory for Jokowi. On the basis of these official results, Jokowi claimed victory today, pointing at a 54.5% lead according to results of 12 polling agencies. His victory was expected, given his strong approval ratings and the fact that he had nominated Ma’ruf Amin – a key religious figure – as his running mate to capture the more conservative Islamic voters. The Indonesian stock market and the rupiah reacted positively to the unofficial outcomes of the elections. The Jakarta Stock Index gained 0.4% today (a strong opening was pared back), while the rupiah showed the strongest appreciation versus USD (0.3%) in almost two months.

2. A Jokowi presidency is good for policy continuity

Assuming that Jokowi has indeed gained a second term, he has to start finding support in parliament and form a government (the 2nd term of his government would not start before October). According to a new law, the president should have the support from parties holding at least 20% of the seats in parliament and gained 25% of the votes during the 2014 elections. One of the goals of this law is to exclude political outsiders from running for president, thereby consolidating the power of Indonesia’s established political parties. General expectation is that Jokowi will succeed in finding the necessary support and forming a government that will remain business friendly and aiming at further improvements of the investment climate and the infrastructure to support economic growth. Jokowi had already rolled out a USD 350bn infrastructure scheme in his first term, while he also intends to invest more in education.

3. Economic growth stable, slight uptick expected

In economic terms, one of the key questions is whether Jokowi in his second term can gather sufficient support to deepen structural reforms, also addressing the more sensitive ones, which would help raising Indonesia’s longer-term growth potential. Since 2014, annual GDP growth has fluctuated in a narrow range around 5%, while Jakarta’s target is 7%. The forward-looking Manufacturing PMI has risen to a three-month high of 51.2 (currently one of the higher levels in emerging Asia). We expect economic growth to rise to 5.5% in 2019-20, supported by fiscal spending and a more benign external environment. With a more dovish Fed, financial markets have become more forthcoming to Indonesia. Moreover, we expect the significant cooling in global industry and trade seen in end 2018 to fade in the course of this year and Indonesia should profit from that. A more constructive response to the US-China trade conflict (with a ‘deal’ now expected in early May) is also helpful in this respect.

4. Low inflation leaves some room for supportive monetary policy

Like in other Asian countries such as India, headline inflation in Indonesia has fallen sharply since 2015. CPI-inflation has fallen to 2.5% yoy in March (February: 6,2%), the lowest level in years. A good harvest helped to keep food prices under control. The March number was at the lower bound of Banks’ Indonesia target range of 2.5%-4.5%. As the main policy rate has been held on hold (6%) since October 2018, the real policy rate (measured as the difference between the policy rate and actual inflation), has risen to 3.5% yoy in March. Against that background and with the Fed more dovish and the current account deficit back under control, we do see some room for Bank Indonesia to cut the policy rate one or two times this year.