Political jitters in Indonesia

This week, almost 200 million Indonesians went to the polls to elect a new president. The result, due in ten days’ time, is seen as pivotal to the country’s direction over the next few years. That’s why the recent erosion of the poll lead for the investors’ favourite, Joko Widodo, known as ‘Jokowi’, has unsettled the Indonesian market – the Jakarta Composite index.

Jokowi was a popular governor of Jakarta, where he “forged a reputation for can-do competence and clean government”, says The Economist.

He would move in the right direction, cutting fuel subsidies that have strained the government budget and focusing on improving education. And his recent protectionist rhetoric is nowhere near as off-putting as his opponent Prabowo Subianto’s “nationalist fulminations”.

Subianto, a former general suspected of human rights abuses, also plans to double the national debt to 50% of GDP and stimulate growth with the borrowed money. That would rattle foreign investors.

Subianto’s steps backwards would be all the more unsettling, because Indonesia has a current-account deficit (a shortfall with the rest of the world). So it needs foreign money to plug the gap.

Will parliament prevent change?

The jitters over the political backdrop may be overdone. As Josh Noble and Ben Bland note in the Financial Times, there’s still a great deal we don’t know.

There has been little detail from either candidate on exactly how they would cut fuel subsidies, accelerate the building of long-delayed infrastructure, or help the export sector reduce its dependence on commodities.

And Subianto’s bluster could always yield to pragmatism in office, says Capital Economics. If that’s so, “his proactive style could actually end up being what the country needs” after the last few years of drift.

Tai Hui of JPMorgan Asset Management also points out that the winner is unlikely to have strong support in a divided and fractious parliament. So, there will probably be a limit on what the new leader can change in any case.

Growth is faltering

The current government has laid solid foundations by getting debt and inflation under control and “undoing the kleptocracy” the dictatorship left behind when it ended in 1998, says William Pesek on Bloombergview.com.

Public debt has slid from 150% of GDP to 25%. Inflation is in the mid-single digits. But the “anti-graft push lost its oomph” in recent years. Indonesia is still seen as more corrupt than Egypt and Kosovo.

Meanwhile, poor infrastructure is a major obstacle to growth. On average, it takes Indonesians 2.6 hours to travel 100km. It takes 1.4 hours in Malaysia and Thailand, says Renan Raimundus in The Jakarta Post.

Structural change to improve Indonesia’s growth potential has been needed for years, but healthy commodity exports and plenty of Western cash papered over the cracks.

Now that those tides are receding, growth is softening from the 6%-6.5% range of recent years. So the key now is to underpin growth by freeing up more of the economy and cracking down on corruption and red tape.

Overseas investment will also be needed to help finance new infrastructure, and to help Indonesia exploit its many assets. As well as plenty of raw materials, the nation has a young population – 26% are under 15 – that is expected to produce 141 million middle-class consumers by 2020. Household debt is just 18% of GDP, suggesting plenty of scope for consumption to grow in the long run.

The economy is also well balanced – domestic consumption provides a counterweight to weakening exports, as it accounts for well over half of GDP.

Our favourite Indonesia play, the US-listed Aberdeen Indonesia Fund (NYSE: IF), trades at an unusually wide discount to net asset value of 12%. That’s low enough to justify a long-term bet on Indonesia – although post-election jitters could make it even cheaper.