What next for Indonesia?

Joko Widodo © Getty Images
Can Jokowi take on vested interests?

The Indonesian president, Joko Widodo (informally known as Jokowi) has won a second five-year term. Global investors will be watching him carefully. At first, Jokowi was seen as a “breath of fresh air, a liberal-minded reformer, a pragmatic achiever and a paragon of secularism”, says The Economist. In a country where 88% of the population is Muslim, and “religion and politics have made violent bedfellows,” he was a welcome new face.

During his first term, he oversaw improvements in Indonesia’s poor infrastructure and also managed to trim the government’s fuel subsidies. But to get re-elected he “betrayed his principles” by making common cause with a hard-line cleric and suppressing some of the opposition. This tendency to court the Islamist vote may be watering down his drive for reform: recent populist moves include nationalising a mine and reversing some of the fuel subsidy cuts.

The economy has expanded at an annual rate of 5% in recent years, and GDP per head is twice that of India. The World Bank’s ease-of-doing-business rankings show a rise from 120th in 2014 to 73rd in 2019, between Mongolia and Greece. However, the nation continues to punch below its weight economically, says Craig Mellow on Barron’s. GDP growth still lags behind the Philippines and Vietnam. The stockmarket is only half the size of Apple’s market capitalistaion, and Indonesia has just four “unicorns” (private companies valued at $1bn or more) compared to China’s 150.

Labour reforms will be crucial

One would expect more from the largest country in Southeast Asia. Indonesia is the fourth-biggest country in the world by population, and it has natural resources from coal, metals, oil, timber and agricultural products. But the country has largely “priced itself out of export-oriented manufacturing”, which slid from 50% to 20% of GDP over two decades, Sriyan Pietersz, investment strategist for ASEAN at Matthews Asia told Barron’s. The most pressing structural reform, therefore, is “loosening labour restrictions and limiting minimum wage hikes to productivity advancements.”

But there has been scant progress on freeing-up Indonesia’s rigid labour market. Everyone is hoping that Jokowi will be more inclined to take on vested interests now that the election is out of the way, says Gareth Leather of Capital Economics, but “we are not holding our breath.” Meanwhile, headwinds continue to mount, as global growth has slowed and commodity prices have dwindled. The large and growing current account deficit, moreover, makes the country vulnerable to a reversal in global risk appetites. Stocks may be in for a bumpy ride.