Sunday, July 12, 2009
Susilo Ensures More Stability & Better Economic Prospects
# July 8: Exit polls show that current President Susilo Bambang Yudhoyono won the Presidential elections by winning twice as many votes as his competitors. Yudhoyono got over 60.9% of votes which gives him the majority count to defeat the two opponents and lead to a single-round victory. Indonesia held its second direct election after ending the authoritarian rule. His competitors included former President Megawati Sukarnoputri and the President's deputy Jusuf Kalla who won over 25% and 12% of votes respectively.
# Yudhoyono's win will seal political stability and will be a positive for the booming equity and currency markets. He has selected Boediono (the former central bank governor) as his running mate, raising credibility in running credible macroeconomic policies. Improving regulation, reforming labor laws and tax policies to raise foreign investment will be his challenges. Continuing with his anti-corruption and anti-extremism approach, and targeted policies for the poor will also boost investor sentiment.
# Given Yudoyono's Democratic party's majority win in April 2009 Parliamentary elections, he will have enough support to implement policies. President Yodhoyono's Democratic Party won over 20% seats in the April 2009 Parliamentary elections which is enough to nominate Yodhoyono as the Presidential candidate without forming a coalition. Parties had to secure at least 20% of seats in the House of People's Representatives (DPR, the legislature) or 25% of the vote to be eligible to nominate presidential candidates for election in July 2009.
# Factors benefiting Yudoyono: Under Yudoyono's rule, GDP growth has risen from 5% in 2004 to 6.5% in 2008 which has benefited job growth and consumer spending. Indonesia is among the few Asian countries to avoid a recession in 2009 and having strong domestic demand. Capital inflows into stock and debt market have boosted these asset markets and raised investment. FDI has improved. Resource sectors and rural incomes have benefited from the recent commodity boom. Government has used fiscal stimulus measures (tax incentive for firms, spending on infrastructure, public services, job creation) to reduce impact of recession on the economy and job losses. Government cut fuel prices in January 2009 and has offered targeted financial support for the poor. The ruling party and President Yudhoyono have encouraged a democratic and secular system and tried to reduce extremism and violence. Yudhoyono has also helped reduce corruption.
# Reform challenges: Foreign investment in resource based sectors has been a point of debate due to impact on poor and social implications. Domestic and foreign investment is also deterred by regulations and red tape, poor infrastructure and investor protection, especially in commodity sectors. This has constrained the much needed foreign investment and technology transfer to develop the commodity sector. Labor laws have led to high structural unemployment and deterred investors. Tax system is also a negative for investors. Fuel subsidies burden the fiscal deficit.
# Indonesia has the potential to achieve higher growth rates provided Yudhoyono emerges with a strong mandate to cut regulations that hinder companies and investment.
# The election has helped consolidate democracy in Indonesia. Yudhoyono and his Democratic Party (PD) is the strongest force in parliament. This will deepen and quicken the pace of reforms and help Indonesia attain higher growth.
# Yudhoyono is considered positive for business and foreign investment, partly on perception of anti-corruption strategy and tendency to appoint qualified policymakers.
# Reform expectations could prove unrealistic. The PD will still require the support of other parties to pass legislation, ensuring that policy-making frustrations will persist during Yudhoyono's second term. Yudhoyono has pledged to double infrastructure spending, privatize state-owned companies and improve Indonesia's attractiveness to foreign investors, which can raise Indonesia's medium- and long-term growth. This will also require additional investments in infrastructure, curtailing corruption and bureaucracy, regulatory reform and stabilization of the currency markets.
# The result of presidential elections will not be a big event for the market as the market-friendly incumbent was expected to return. Nevertheless, removing political uncertainty will further boost capital inflows.
# Yodhoyono seems to have made the best of the tools at his disposal. Small fiscal deficit can provide more fiscal stimulus. Strong private consumption, buoyed by tax cuts and handouts, supported GDP growth in Q1 2009. Rupiah, appreciated against the U.S. dollar since November 2008, has been steadied by various stand-by-loans and currency swap agreement. Stock market has boomed in 2009.
# Golkar and PDIP parties might unify and pose challenge to Yudhoyono, not in the presidential race, but as a challenging opposition to legislative reforms in parliament.
# As long as Indonesia continues to be led by secular parties and leaders who do not pose threat to ethnic minorities (e.g. Chinese business establishment), the investor community is unlikely to be concerned.
p/s photos: Pace Wu Pei Ci