Indonesia 2014 Elections Preview: Economic Reforms Unlikely To Come In The Medium Term, GDP Growth To Remain Stagnant

Indonesia is set to have its parliamentary elections next month, before holding its presidential election in July. But even if the current favorite to become the next Indonesian president, Joko Widodo, wins the elections successfully, in the short term this will likely have little positive effect on the Southeast Asian country’s reform potential. As such, progress on hot-button issues like fuel subsidies will likely remain stagnant in the short and medium terms, and growth prospects will remain weak.

Current governor of Jakarta, Joko Widodo, has just been appointed by the Indonesian Democratic Party of Struggle (PDIP), and is already a poll favorite to win the presidential seat due to his popular image. His candidacy was met with enthusiasm among voters and investors alike.

“Voters are drawn to Joko’s image as a reformer, political outsider and the perception of his incorruptibility,” researchers for the Eurasia Group, an economic and political research firm, wrote in a note on Tuesday.

However, despite his popularity, Joko and his administration’s capacity for reform may be overhyped, and any benefits to foreign investors will likely be slow to come, if at all, as the PDIP is “the most nationalistic among the major parties, both in terms of protecting Indonesia’s natural resources and the welfare of its people,” Nomura researchers wrote in a note on Friday. The presidential candidate will also face considerable pressure from both inside and outside his party.

The most prominent of Indonesia’s economic problems, the fuel subsidies which pushed the nation’s budget deficit over the legal limit of 3 percent, will not be reduced this year or next, as elections loom. The subsidy is the world’s third highest, according to a study from the Energy Institute at Haas, and last year cost the Indonesian government more than $25 billion, more than 25 percent above the budgeted $19.3 billion.

“Apart from fiscal risks, this would have negative implications on the current account balance, with fuel overconsumption, and resultant importation remain a concern,” Nomura analysts wrote. “In addition, this could crowd out allocations for much needed infrastructure spending, which are currently already below subsidy spending.”

Other factors that could put a damper on reform and pose potential risks to Indonesia’s foreign direct investment (FDI) outlook include continued labor market rigidities, and the responsibility to enact a number of regulations left from the current administration.

“If PDI-P continues to pursue a strong nationalist stance, all these will potentially have adverse effects, not only on foreign investment in these sectors, but on the overall investment climate,” according to Nomura.

As such, Indonesia is projected to expand its economy by 6–6.5 percent in the medium term, which are not bad numbers compared to other emerging markets, but well below the government’s 7 to 7.7 percent growth target in 2014. For now, there are two indicators for the economic and political future to watch for: Joko’s vice presidential pick and how the PDIP and competitor parties perform in the upcoming parliamentary elections, both of which would signal the strength of Joko's possible reforms.