Joko “Jokowi” Widodo begins his reign as Indonesia’s president on Monday but, after a year of talk and promises, it is still not clear what control he will actually have.
In short, he might be the new leader of Asean’s largest economy but his presidential rival – former general Prabowo Subianto – controls parliament through his Red and White Coalition (RWC).
After defeating Subianto in the presidential race by a closer-than-expected margin of 53.15% to 46.85% in July, Widodo has set about glueing together an uncertain leadership under the umbrella of the Great Indonesia Coalition (GIC).
He has met with members of the legislative leadership and also Subianto himself, who congratulated Widodo on his victory. This goes some way to greasing the wheels but no one is being fooled.
“[Widodo] cannot afford to let his guard down, and the best bet for him is to deliver hard reforms to boost growth sustainably,” Wellian Wiranto, economist, treasury research and strategy at OCBC Bank, wrote in a research report.
Widodo was a can-do Jakarta governor but, as president of Indonesia, hard reforms in this political environment will not be easy.
Cutting the country’s huge fuel subsidy, tackling corruption and improving Indonesia’s inadequate infrastructure are just three of the issues he faces in his first months in office.
Indonesia's stock market, which rose steadily this year on the back of Widodo’s ascent, has stalled somewhat since the parliamentary elections in April.
The Jakarta Composite index added about 18% from January to April but the triumphant PDI-P party then failed to get a sufficient mandate and so coalitions were formed, leaving the opposition RWC with effective control. So the market since April has risen just 2%.
The political bartering that has since ensued has effectively left Widodo’s leadership looking less firm. For example, the GIC this month also failed to secure a majority in the largely ceremonial People’s Consultative Assembly.
Wijayanto Samirin, a policy adviser to Widodo, told FinanceAsia it would be tough for the president to conduct dramatic policy reform because it required legislative approval, which is not certain.
“These [political defeats] are a great loss for Jokowi but he could recover,” Samirin told FinanceAsia. “So what if Prabowo's camp still dominates the legislative branch? Jokowi is still able to lead and there are a lot of things he could do.”
Tests ahead
This will be tested almost immediately by the political hot potato of the country's fuel subsidy, which is set to cost the government Rp246.5 trillion ($20.5 billion) this year – up from Rp82.4 trillion in 2010 – and which economists say urgently needs cutting.
Although the move is deemed crucial by businesses and investors to free up funds for infrastructure projects, the public – accustomed to low fuel prices – may not be so welcoming. Timing and magnitude will be vital.
Improved standards of governance represents another challenge. One of Widodo’s big election promises was to deal with corruption, something which excited investors throughout his campaign but which appears to have become more muddied of late.
In September, Indonesia’s outgoing parliament voted to abandon direct elections at a local government level. Outgoing president Susilo Bambang Yudhoyono has since suspended the decision but the development is a stark reminder of the old cronyism that has marked Indonesia’s past.
Still, Widodo’s efforts to build support across political divisions has provided some grounds for optimism.
“Recently sentiment broadly has improved,” Tigor Siahaan, chief country officer for Citi in Indonesia, told FinanceAsia. “[Widodo has] welcomed the parliamentary dynamic as being important in terms of checks and balances against the government."
Perhaps most importantly there is no evidence to suggest that foreign investors have given up on Widodo, suggesting that they too will give him time to get it right. The bond market has remained resilient so far this year, with foreign ownership of Indonesian government bonds reaching a record high in August at about 36% of the market.
One outstanding piece of the jigsaw is the imminent announcement of Widodo’s cabinet, which will go some way to completing the picture for investors.
Pahala Mansury, chief financial officer of Bank Mandiri, Indonesia’s biggest bank, told FinanceAsia that the market was expecting the cabinet to be formed of professionals with the ability to execute, especially in the key economic posts.
“A more significant shift in investor confidence will be seen after the cabinet is formed and announced. We will see that many investors are still on the fence about the implications of the new government on future policies,” he said.
Perhaps we can expect some of those investors to jump off that fence in the next few months.
