Jokowi to tackle economic growth risks

Indonesian President "Jokowi" Widodo heads into his second term with a stronger mandate to tackle the significant risks facing Southeast Asia's biggest economy.

Jokowi won the April 17 presidential race with 55.5 percent of votes, official results released on Tuesday showed. His margin of victory over his opponent Prabowo Subianto almost doubled from 2014, while parties in his coalition are set for a majority in the lower house of parliament. Prabowo has not conceded yet and his supporters are staging protests, prompting authorities to lock down parts of the capital.

The President must now deliver on a reform agenda that includes plans for record spending on new infrastucture over the next five years. He will also need to attract foreign investment and navigate a worsening global trade environment, which is weighing on growth.

"Jokowi is well placed to push ahead with his economic agenda, which will center around developing infrastructure and streamlining byzantine red tape in order to attract investment," said Hugo Brennan, principal political analyst with Verisk Maplecroft in London.

While Jokowi will not be inaugurated until October, he has already set about drafting plans to spend more than US$400 billion on infrastructure, such as building new power plants and airports. As much as 40 percent of the total is expected to be funded directly by the government, 25 percent through state-owned enterprises and the rest through the private sector.

The President is betting on a spending boom to lift economic growth, which has not hit the 7 percent target he set in his first term. The trillion-dollar economy grew 5.07 percent in the first quarter, the slowest expansion in a year.

Jokowi has ordered his Cabinet to try stimulate the economy by boosting investment and exports. With the budget deficit forecast at 1.84 percent of gross domestic product - well below the 3 percent ceiling - the government has room to pursue more expansive fiscal policies after a year of aggresive monetary tightening.

Weaker global demand and the United States - China trade tensions have weighed on exports, pushing the trade deficit to its widest in at least a decade. That makes it more difficult for the government to rein in the current account shortfall from a four-year high in 2018, and means it remains reliant on foreign inflows to fund imports.

With global risks rising, foreign funds have once again began dumping emerging market assets, including Indonesian stocks and bonds. Investors will be watching if Jokowi can pursue structural reforms to lure more stable foreign direct investment instead. Brennan said investor sentiment in the mining sector would continue to be undermined by "resource nationalism and a clear preference for domestic state-owned enterprises."

 

Karlis Salna

BLOOMBERG/JAKARTA