What Jokowi’s Second Term in Indonesia Means for the Economy

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With Indonesian President Joko Widodo on course to win a second term as leader, the political uncertainty that's weighed on the economy this year will be lifted.

Unofficial counts from Wednesday's election shows Jokowi -- as the president is known -- defeating Prabowo Subianto for a second time by a comfortable margin. If that's confirmed by the official results due in May, it gives Jokowi another five years to build on his solid performance: the economy is set to grow more than 5 percent this year, inflation is under control and the currency has stabilized after last year's sell-off.

Read More: It's Now or Never for Jokowi to Fix Indonesia After Election Win

Here's a look at what the result means for economic policy:

What were Jokowi's main policy pledges?

The president wants to speed up infrastructure spending in Indonesia, especially on urban and digital projects, to boost economic growth. He's also promised to reduce poverty, keep prices low and improve tax revenue. The government has already embarked on a $350 billion infrastructure drive, the biggest in the nation's history, but needs to do more to ease bottlenecks, particularly in transport and electricity. He's also expected to spend more on education and training in order to create 100 million jobs in the next five years to provide work for the growing number of millennials entering the labor market each year.

What does it mean for the economic outlook?

The government is forecasting growth of 5.3 percent this year and as much as 5.5 percent in 2020, with downside risks coming from slower global growth and unresolved trade tensions between the U.S. and China. Unlike other export-heavy economies in Southeast Asia like Malaysia and Thailand, Indonesia is more reliant on domestic sources of growth, such as consumer spending. Subdued inflation and a stable currency may help spur household sentiment and expenditure, which is already getting a boost from Jokowi's social welfare spending and fuel subsidies. A key focus area will also be on narrowing the current-account deficit, cited as a key risk for the rupiah. The government imposed import curbs to reduce overseas demand, as well as promote the use of biofuels to cut down on crude imports.

How does it affect fiscal policy?

Much will depend on whether Jokowi chooses to retain his finance minister, Sri Mulyani Indrawati. She was successful in narrowing the budget gap to 1.76 percent of GDP last year, well below the 3 percent ceiling, and improve tax compliance. However, Indonesia's tax-to-GDP ratio remains low at about 12 percent. Jokowi has pledged to borrow only to finance infrastructure projects, and to reduce the reliance on foreign ownership of government bonds. The jump in oil prices this year will help boost government coffers, but if Jokowi keeps fuel subsidies in place, rising crude will put additional strain on the budget.

Will monetary policy change?

Inflation has been subdued, slowing to a decade-low of 2.5 percent in March. The central bank -- which has kept its key interest rate unchanged at 6 percent this year after six hikes in 2018 -- expects inflation to stay inside the 2.5 percent to 4.5 percent target this year. Low food prices and fuel caps have helped to keep inflation under control, while the U.S. Federal Reserve's shift away from rate hikes has fueled a rebound in the currency, giving Bank Indonesia scope to extend its policy pause. The central bank has a policy decision next week, and while there have been growing calls for rate cuts, Governor Perry Warjiyo has signaled a more cautious approach given global risks. He took office in May last year, and his term doesn't expire until May 2023.

What does it mean for the currency?

A Jokowi win removes some of the policy uncertainty that's kept investors on the sidelines in the run-up to the election. The rupiah and stocks rallied on Thursday, with the currency gaining 0.3 percent to 14,045 against the dollar and the benchmark equity index rising 0.4 percent. The central bank has been proactive in stabilizing the currency after last year's sell-off and has more than $120 billion in foreign exchange reserves it can use to defend the rupiah. It also regularly provides liquidity in times of market stress. To boost confidence in the currency over time, the new administration will need to bring down imports in order to tackle the current account deficit.

What's next?

The official result will only be announced in May, and, if confirmed, Jokowi will be sworn in for a second term in October. Prabowo has threatened to legally challenge his defeat, and investors may remain cautious until the official results are known. Until Jokowi begins his second term in October, expect it to be business as usual for government programs. The president is likely to make some changes in his cabinet, with investors keenly watching if he'll keep Indrawati as finance minister or move her to a different post. A former managing director of the World Bank, she is well-respected by the international community. Other key appointments to watch for include ministers of trade, economy, energy and mineral resources. The head of the investment board, a cabinet position in Indonesia, is also crucial.

To contact the reporter on this story: Karlis Salna in Jakarta at ksalna@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net;Thomas Kutty Abraham at tabraham4@bloomberg.net

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