Continuity in Indonesia with Joko Widodo expected to win

The April 17th Presidential Election in Indonesia is now over with more than 190 million people voting and two major parties among many others, fighting for the presidency - incumbent President Joko Widodo's Indonesian Democratic Party of Struggle (Partai Demokrasi Indonesia Perjuangan, PDI-P) and Prabowo Subianto's Great Indonesia Movement Party (Partai Gerakan Indonesia Raya, Gerindra). While the General Elections Commission, Komisi Pemilihan Umum (KPU), will take several weeks to count and announce the official results, early unofficial exit polls show that Widodo has very likely won a second mandate with 55% of the vote.

If Widodo is eventually the official winner of the 2019 elections, it means that there will be probably a continuity with the economic plans and reforms, he implemented since 2014. However, the fact that Widodo has picked Ma'ruf Amin, former Nahdlatul Ulama Supreme Leader, as his Vice-President, he will have to carefully manage his political and economic agendas between the Islamists and the more moderate, progressive Muslims in his second term.  

"If Widodo is eventually the official winner of the 2019 elections, it means that there will be probably a continuity with the economic plans and reforms, he implemented since 2014." 

Indonesian Economic Outlook

 

In 2014, Joko Widodo was elected as the next Indonesian President. While his main target at that time was to lead Indonesia through a 7% annual economic growth, over the next 5 years till 2018, the growth rate of the Indonesian gross domestic product (GDP) only averaged slightly above 5%. However, under Widodo's leadership, Indonesia's GDP passed through the $1 trillion mark, reaching $1.015 trillion in 2017 from $890.8 billion in 2014, according to the World Bank data (GDP, current US$). As for GDP per capita (current US$), it increased from $3491.60 in 2014 to $3846.86 in 2017.

 

According to the United Nations (UN) Conference on Trade and Development (UNCTAD), the foreign direct investment (FDI) inward flow to Indonesia was $21.81 billion, $16.66 billion, $3.92 billion, and $23.06 billion for 2014, 2015, 2016 and 2017 respectively. The 2016 significant dip in FDI was mainly due massive political and social tensions over Widodo's protégé, the popular Christian and ethnic Chinese Jakarta Governor Basuki Tjahaja Purnama (Ahok), being accused of blasphemy by the Islamists. Concerned over Ahok's popularity and political ambitions, the Muslim political elite played the religious card and instigated the Islamists. Massive demonstrations were organised to thwart his political endeavors. 

As for international trade, during Widodo's mandate, Indonesia has been able to maintain a positive trade balance, except in 2014 and 2018, according to the data from the UN Comtrade. China, Japan and Singapore are its top three main trading partners. As for Indonesia's global exports, they slumped from a high of $203.5 billion in 2011 to $176 billion in 2014 and reached a low of $144.5 billion in 2016. The fact that Indonesia is a major exporter of commodities, it has been greatly affected by the collapse of commodity prices like crude oil, palm oil, minerals and others. Subsequently, with the recovery of commodity prices, international exports increased to $168.8 billion and $180.2 billion in 2017 and 2018 respectively. 

Widodo's Economic Reform

 

At the start of Joko Widodo's mandate in 2014, Indonesia's ranking in the World Bank Doing Business was 120 and by 2019, its ranking has improved significantly to 73. Thanks to Widodo's recognition that Indonesia needs to reform and that he needs capable people to steer the economy forward, he managed to convince Sri Mulyani Indrawati to join his cabinet as the Finance Minister in 2016. As Finance Minister during the Susilo Bambang Yudhoyono's Presidency, Indrawati has been instrumental in reforming the Indonesian economy and attracting more foreign investments. 

Among the first reform measures after winning the elections in 2014, Widodo curbed and overhauled the energy subsidies, representing about $20 billion, a significant amount of the government budget. Moreover, Widodo regularly released reform packages about deregulation, tax, customs and others as well as changed or eliminated thousands of government regulations with the aim of making it easier to do business in Indonesia. 

 

In addition, to solve the infrastructure deficit in Indonesia, he pushed forward several infrastructure projects, like power generation, building of roads, ports and airports, to fulfill his growth plans. To attract and facilitate investments into Indonesia, Widodo also launched the One Stop Service Center by the Baden Koordinasi Penanaman Model (BKPM), the Indonesian Investment Coordinating Board. 

 

Back to Indonesia from World Bank

 

Prior to her appointment as Finance Minister in the Widodo's cabinet, Sri Mulyani Indrawati was also Finance Minister in the Yudhoyono government from 2005 till 2010. Subsequently, she joined the World Bank as a Managing Director till 2016. 

Taking on Widodo's challenge, she pushed forward the necessary economic reforms in Indonesia. Its World Bank Doing Business ranking improved dramatically from 109 in 2016 to 73 in 2019. After the significant FDI slump to $3.92 billion in 2016, under Indrawati's supervision, the Indonesian economy managed to attract $23.06 billion in investments the next year. Among all the ASEAN (Association of Southeast Asian Nations) countries, Indonesia has in fact improved the most in the Doing Business ranking from 2014 to 2019.

Besides improving dramatically the business climate, to fund the economic reforms and growth plans, the Widodo's government aimed to implement tax reforms as well as improve tax compliance and collection. However, despite the efforts of Indrawati and her tax reform team, the tax revenue to GDP has not really improved and stagnated at around 10%. 

 

As for the tax amnesty program between July 2016 and March 2017, Indrawati's tax team exceeded its target by uncovering about $365 billion of hidden assets. However, the repatriated funds to Indonesia were only $11 billion, less than its target of about $75 billion. This means that there is still room for improvement in the tax reforms. Indrawati warned wealthy tax dodgers that they won't have any more chances after the amnesty program.

Future Outlook for Indonesia

 

The last five years have been a mixed bag of results for the Indonesian economy. While Joko Widodo has been able to push forward economic reforms to make the business climate more conducive, the growth rate has not met his target of 7%. To do so, there is a need for much more capital investments in infrastructure and to climb up the manufacturing value chain in the global supply chain.

 

In 2016, Joko Widodo and his government put forward an e-commerce roadmap and economic plans to build and increase the digital economy of Indonesia by overhauling the computer science curriculum, supporting the creation of technology incubators and accelerators as well as attracting domestic and foreign venture capital around promising startups. So far, he has been able to create an ecosystem for digital startups, that brought about tech unicorns like Go-Jek, Traveloka, Bukalapak and Tokopedia. Indonesia's digital economy has attracted major foreign investments from Alibaba, Expedia, Softbank Vision Fund, Tencent as well as Singapore sovereign wealth funds like Temasek Holdings and GIC. The future of Indonesia's digital economy looks bright with more tech unicorns created in the near future.

Infrastructure investments have been a key part of Widodo's growth agenda. To attract more Chinese investments and project financing from the Asian Infrastructure Investment Bank (AIIB), he participated in the first Belt and Road Summit in 2017. And he aligned Indonesia closer to China's Belt and Road Initiative (BRI). While some projects have been completed, others, like the Jakarta-Bandung High Speed Railway Project, have been stalled. Going into his second mandate, Widodo will very likely continue on focusing on BRI for Indonesia's infrastructure needs. However, he will have to handle prudently the anti-Chinese sentiments within the country.

With the rise of Islamism in Indonesia, especially after the high profile blasphemy case against Basuki Tjahaja Purnama, Joko Widodo made a tactical move and shrewdly picked Ma'ruf Amin as his running mate in the recent elections. With the unofficial results showing that it was indeed a strategic move, Widodo will now have to manage carefully the Islamists to achieve his economic plans in his second mandate. With the right policies in place, Indonesia under Widodo can potentially reap many future economic opportunities to solidify further its position as the biggest economy within ASEAN.

(Published April 2019)

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