From Institutional Investor, April 1 2014
by Aaron Timms
With India and Indonesia due to hold elections this month, markets in both countries have rallied strongly over the past few weeks. In India the benchmark CNX Nifty index of the National Stock Exchange of India has gained just above 5 percent in March as investors cheer the likely triumph of the pro-business Narendra Modi of the Bharatiya Janata Party (BJP) at the general election, which will begin on April 7.
Indonesia has seen a similar rally since the governor of Jakarta, Joko Widodo, better known as Jokowi, declared his candidacy on March 14 for July’s presidential poll, providing the Indonesian Democratic Party–Struggle (PDI-P), headed by former Indonesian president Megawati Sukarnoputri, with a useful fillip ahead of April’s legislative elections. Investors have a relatively clear sense for the economic policy platform that Modi, who has been chief minister of the state of Gujarat since 2001, will pursue in the likely event of a victory for the Hindu-nationalist BJP, which leads the Democratic National Alliance coalition, in May. Polls suggest Jokowi is a shoo-in to succeed Susilo Bambang Yudhoyono, who is stepping down after a decade in power. Support for the charismatic 52-year-old Jakarta governor is at or above 40 percent, four times more than his closest rival, former special forces commander Prabowo Subianto. But questions remain as to how much is really known about how Jokowi would govern the country.
“The market is right to be somewhat optimistic about Jokowi,” argues Jan Dehn, head of research at Ashmore, a London–based emerging-markets investment management firm with $75.3 billion in assets under management as of year-end 2013. Indonesia has many fundamental strengths, he adds. Of its population of 254 million, 44 percent is under the age of 24. Household consumption accounts for more than 55 percent of gross domestic product. “All that it needs is more competence in government and stronger leadership,” says Dehn. “Jokowi appears to embody those qualities.”
Indonesia’s economy, which along with India is among the so-called Fragile Five emerging markets, got battered in 2013 amid fears of the U.S. Federal Reserve tapering quantitative easing. But since the beginning of this year, Indonesia has shown a promising recovery. The Jakarta stock exchange composite index has surged 10 percent, the current-account deficit has narrowed from its record high 4.4 percent of gross domestic product in the second quarter of 2013, and foreign exchange reserves have recovered following their depletion late last year as outflows forced the Indonesian central bank to step in to defend the rupiah. “There’s every chance the recovery is sustainable,” argues Hugh Young, head of Aberdeen Asset Management Asia, part of Scotland’s Aberdeen Asset Management, which has $320.6 billion in assets under management. Young adds that likely sustained currency weakness and interest rates at 7.5 percent should be an impetus for further narrowing of the current-account deficit.
Jokowi, a former furniture businessman whose first foray into politics was as mayor of the ancient Javanese city of Solo, also known as Surakarta, shot to national prominence in 2012 with his shock election as governor of the province of the nation’s capital. He has favored a relentlessly upbeat, active and engaged style of government during his time running Jakarta, in pointed contrast to the relatively aloof approach favored by many of Indonesia’s public officials. Two ideas sit at the heart of his style: what’s known in Jokowi’s native Javanese as punya gaye (can-do) populism, a personal, hands-on approach to solving public problems whose most immediate U.S. analogy is perhaps the Twitter-assisted interventionism of Newark, New Jersey, mayor-turned-U.S.-Senator Cory Booker; and blusukans (impromptu visits) with constituents in Jakarta’s poorer districts on issues of everyday concern such as food prices, housing and transportation. This approach has garnered Jokowi a reputation of honesty and integrity — a valuable commodity in a nation blighted by corruption and poor governance.
With an outright PDI-P majority unlikely, the party will have to form a coalition in the Dewan Perwakilan Rakyat, Indonesia’s functional equivalent of the U.S. House of Representatives, in order to govern. “There’s no evidence yet of Jokowi’s ability to form alliances in order to get things done,” notes Ashmore’s Dehn. “He simply hasn’t had to deal with that dynamic during his time as governor.” Jokowi has yet to nominate a running mate, although recent reports suggest as a front-runner Jusuf Kalla, who served as vice president during Yudhoyono’s first term, from 2004 to 2009. Markets would be likely to support Kalla’s nomination. But there’s a broader question of whether Jokowi, even with a heavy popular mandate, will be able to break the cycle of what Ulla Fionna, a visiting fellow at Singapore’s Institute of Southeast Asian Studies, describes as the “cartel-like behavior” and dysfunction that have characterized Indonesia’s coalition-based politics since the return to democracy following the forced resignation of former dictator Suharto in 1998.
Former presidents Megawati and Yudhoyono arrived in power with lofty expectations similar to those presently surrounding Jokowi. But early hopes for their administrations quickly faded amid corruption scandals and the inherent compromises of coalition-based government. If elected, Jokowi will be the first president of Indonesia with no connection to the powerful, wealthy families that have ruled Indonesia since the country gained independence from the Netherlands after World War II. “Because he doesn’t have the same connections, he may not feel the same obligations,” argues Dehn. “There are grounds to believe that he would be different.” But with institutionalization of Indonesia’s political parties still weak and the necessity to form coalitions and alliances still at the heart of the policymaking process, it’s unclear whether Jokowi will be able to rise above the toxicity and graft that blighted previous administrations and project his record of clean, hands-on governance effectively onto the national stage.
Nor is much known about Jokowi’s stance on the big questions of national policy. As governor of Indonesia’s notoriously gridlocked capital, he has focused most closely on infrastructure development, transport problems and poverty reduction schemes. His signature projects have been the construction of a monorail system, breaking ground on a mass transit system, attempts to improve tax collection and free health care for the city’s 3 million poorest residents. A commitment to greater fixed-asset development at the national level would sit well with investors, according to Dehn, who describes poor infrastructure “as the single most important constraint on lifting Indonesia’s growth today.”
But elsewhere, the nation’s broader political conversation has turned decisively against foreign investment. A recent rule bans mineral exports and taxes concentrate shipments to force miners to build smelters locally. Young thinks it unlikely that Jokowi — or any of the other candidates in this year’s election — will disturb that policy, given its popularity among the electorate. There’s also general uncertainty over whether Jokowi’s hands-on populism will harmonize with the rigor and discipline needed to set Indonesia on the path of sound economic management.
“There may be a grand plan, but it’s not defined yet,” says Dehn. Jokowi’s national policy platform should become clearer once the dust settles following the legislative election. But until then, investor optimism around the likely ascent of Indonesia’s new political star seems bound to carry a note of caution.
Follow Aaron Timms on Twitter at @aarontimms.