ANALYSIS: Indonesia election results unlikely to ramp up reforms

By Max Sato

TOKYO, NNA – Indonesian President Joko Widodo is set to score a comfortable win in Wednesday’s elections, suggesting infrastructure development and social programs will continue, but analysts predict only small steps toward easing control on foreign capital and sweeping out deep-rooted corruption.

They also expect the government will maintain its accommodative macro-economic policy to support modest annual growth of around 5 percent amid a slump in commodities prices and short-term drag from the U.S.-China trade spat.

“The president has had a protectionist tone in order to win voter support for a second five-year term, but since this is his last term, he may try to shift toward easing regulations on foreign capital,” said Makoto Saito, economist at NLI Research Institute. “However, I don’t have high expectations given opposition from within.”

Toru Nishihama, chief economist at Dai-ichi Life Research Institute Inc., agreed.

“It is highly unlikely that structural reform will be implemented,” he said. “What I’m concerned about is that Joko has to maintain the support of Islamic voters and if that leads to enforcing more Islamic values in business practices, it could discourage foreign companies from investing in Indonesia.”

Nishihama noted that the general election that also took place on Wednesday appeared to show no upset in the political landscape. “The same kind of people are being elected, which means Indonesia won’t change fundamentally.”

“Indonesian economic growth has slowed to around 5 percent from 6 percent and is stuck in that recent range because of the slow pace of reform,” Nishihama said.

Yuta Tsukada, vice senior economist at Japan Research Institute Ltd., said he had sensed a change in tone in Joko’s policy priorities.

“Joko came to power five years ago with his reform agenda and emphasized industrializing the economy with infrastructure development and narrowing the inequality gap with social programs,” he said, adding that the president shifted to a more populist approach during the campaign.

“The government will end up giving out cash in the form of scholarships and sending money to the farmlands, where corruption is known to be widespread,” Tsukada said.

Joko has increased fuel subsidies and kept the increase in the infrastructure budget low, he said. “While voters won’t see quick benefits from infrastructure, they can see the effect of subsidies on daily life when oil prices are rising, but that’s just a cash handout.”

Based on official figures, Tsukada estimates that manufacturing in Indonesia as a percentage of real GDP shrank to 21.0 percent in 2018 from a peak of 24.3 percent in 2004.

“During the 1990s, Thailand and Malaysia posted high economic growth by attracting foreign investment, with the manufacturing ratio reaching 25 to 30 percent,” he said.

The ratio of foreign direct investment in Indonesia to nominal GDP fell to 2.9 percent in 2018 from 3.4 percent in 2015, Tsukada said.

“Foreign companies have had hopes and disappointments throughout this time. They need a clearer picture of what will happen to Indonesia before deciding to invest,’ he said.

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