No hon­ey­moon for In­done­sia’s Jokowi

Financial Mirror (Cyprus) - - FRONT PAGE - Mar­cuard’s Mar­ket up­date by GaveKal Drago­nomics

In the next few days In­done­sia’s Con­sti­tu­tional Court will rule on a chal­lenge mounted against Joko Wi­dodo’s vic­tory in this month’s pres­i­den­tial elec­tion. All the in­di­ca­tions are that the court will dis­miss the com­plaint filed on Fri­day by de­feated can­di­date Prabowo Su­bianto, who al­leges mas­sive elec­toral fraud. Yet if the court does throw out Prabowo’s chal­lenge for lack of ev­i­dence as ex­pected, Joko’s dif­fi­cul­ties will not be over. In all like­li­hood, they will only just be start­ing.

When he is sworn in on Oc­to­ber 20, Jokowi, as the new pres­i­dent-elect is uni­ver­sally known, will im­me­di­ately have to tackle one of the most sen­si­tive topics in In­done­sia’s po­lit­i­cal econ­omy: fuel sub­si­dies. Although he pledged in his cam­paign to elim­i­nate sub­si­dies en­tirely over the next four years, this is eas­ier said than done. Past fuel price hikes have fo­mented im­mense dis­con­tent, and in 1998 trig­gered the un­rest that led to the over­throw of Pres­i­dent Suharto. Although sev­eral po­lit­i­cal par­ties that sup­ported Prabowo’s can­di­dacy are now likely to switch their al­le­giance to Jokowi, the ex­tra sup­port will by no means guar­an­tee the new pres­i­dent’s pol­icy an easy pas­sage. In his ten years in of­fice, out­go­ing pres­i­dent Susilo Bam­bang Yud­hoy­ono failed to achieve a con­sen­sus on the mat­ter, even though his ad­min­is­tra­tion com­manded the sup­port of a grand “rain­bow coali­tion” in par­lia­ment.

With the govern­ment’s deficit threat­en­ing to breach its le­gal cap at 3% of GDP, re­duc­ing the fis­cal bur­den of fuel sub­si­dies is be­com­ing in­creas­ingly ur­gent. Ar­ti­fi­cially low prices have boosted do­mes­tic fuel de­mand even as they have cut the in­cen­tive for up­stream ex­plo­ration and pro­duc­tion. As a re­sult, In­done­sia-once a ma­jor oil ex­porter-has be­come in­creas­ingly re­liant on im­ports of re­fined fu­els. That de­pen­dency has not only ex­ac­er­bated the ex­ter­nal deficit. With the ru­piah down 15% against the US dol­lar over the last 12 months, the ex­tra cost of the sub­sidy pro­gramme has also put the govern­ment’s fi­nances un­der se­vere pres­sure.

By de­liv­er­ing on his prom­ise to curb sub­si­dies Jokowi will not only al­le­vi­ate In­done­sia’s twin deficits, he will also sig­nal to in­vestors that his govern­ment has the mo­men­tum to over­come even the most daunt­ing po­lit­i­cal ob­sta­cles. How­ever, re­form is the art of the pos­si­ble, and much back­room deal­ing and com­pro­mise will be needed to get the leg­is­la­ture to work with the govern­ment rather than against it. Here, the ex­pe­ri­ence of Jusuf Kalla, Jokowi’s run­ning mate and the vice pres­i­dent dur­ing Yud­hoy­ono’s first term in of­fice, will be cru­cial in build­ing sup­port across party lines. Kalla’s party, Golkar, the sec­ond largest in par­lia­ment, backed Prabowo for pres­i­dent, but is now likely to switch its sup­port to Jokowi.

There are no quick fixes for an econ­omy that is just past the peak of its busi­ness cy­cle and which faces stiff ex­ter­nal head­winds as the China-driven re­source boom fades. Jokowi’s plan to lift eco­nomic growth to 7%-a pace not seen since be­fore the Asian Fi­nan­cial Cri­sis­de­pends on en­hanc­ing pro­duc­tiv­ity through in­creased pri­vate sec­tor in­vest­ment in in­fra­struc­ture and man­u­fac­tur­ing. Cut­ting red tape and fos­ter­ing com­pe­ti­tion in an econ­omy where the line be­tween busi­ness and pol­i­tics is of­ten blurred will be a tall order, but Jokowi’s track record as mayor of Jakarta is en­cour­ag­ing. As a re­sult, the long term prospects for In­done­sia re­main favourable, even though the short term cycli­cal head­winds make the sit­u­a­tion seem bleak.

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