Commentary by Wayne Forrest
I spent 9 days in Indonesia recently, April 20-30, and had very productive meetings in Jakarta and Banda Aceh. The run up to the recent Presidential Election was much hyped by the international media as a serious threat to Indonesia’s pluralist state. To me, it was much ado about nothing. Indonesia is no more going to become an Islamic state than it ever has since its founding 70 years ago. I’ll get to that but first let me lend my “unscientific” observations based on my conversations with local and international business people, sitting Ministers, political party supporters, state-owned companies, a sprinkling of taxi drivers, hawkers, students, and of course, our members with in-country operations.
Jakarta was quite calm and many people I spoke with did not take seriously the threatening public statements from Prabowo, who has yet to concede and believes the count was fraudulent. Jokowi supported reported that the President is disappointed he did not reach the 60% target which was the margin President Yudhoyono won in his reelection in 2009. PDI-P also thought it would significantly increase its seats in Parliament, but the direction of the count so far indicates otherwise. Based on the results so far here are a few conclusions:
- Compared to 2014 the President’s margin of victory will widen by almost a factor of two from 8 to 15 million votes
- Parties with more of an Islamic affiliation are stuck at around 30%, similar to where they were in the 1950’s. Secular parties have become more Islamic and it’s a bit of an analytical conundrum to determine who may be co-opting who.
- Indonesia politics is highly consensual with no history of true opposition parties. Rumors are that Prabowo’s young running mate Sandi Uno may be seeking a future benefit for helping to broker peace.
- If Indonesia had an Electoral College, Prabowo may have done much better, or perhaps won as he captured 18 of 34 provinces.
As usual the election was won on the populous island of Java, especially central and east Java, which voted overwhelming for Jokowi. Voters there may have been positively influenced by the messaging of NU (a large and popular moderate Muslim social organization) for a unified Indonesia based on the secular, pluralist Pancasila ideology and an Islam tolerant of all religions. NU pinned this more on Jokowi rather than Prabowo (also a secularist) who courted more of the Islamist, Wahabbist right wing.
- The election may have proven that Indonesia is moving even further from the notion of a religious-based state. Democracy is prevailing and consolidating. The fly in the ointment is growing religious intolerance and gender discrimination, spread through certain mosques and on social media.
- Aceh, where I spoke at an international business conference AICC helped organize, voted overwhelmingly for Prabowo (80%). This region is the only area allowed to have sharia laws and would naturally candidates who stand up for Islam. However, many I spoke with voted for Prabowo not because of sense that he was the better Muslim but because they were not happy with Jokowi’s performance.
Both local and foreign businessmen reacted well to Jokowi’s victory, believing his administration continues to have an overall positive impact on business. State sector expansion (crowding out private sector), lack of coordination of policy between ministries, and the lack of competency and capacity within government remain at the top of the list of concerns. He is viewed as hard working, honest, but not necessarily surrounded by the “right people”.
The Jokowi government remains committed to an economy less reliant on foreign management of natural resources, where local production is encouraged and sometimes mandated. These imperatives currently inhibit rather than enhance GDP growth predicted to stay in the 5% range for the next several years. Assuming Jokowi is named the winner, the consensus expectation is that he will continue to expand the role of state enterprises, bring further efficiencies to government, but not embark on major reforms. Several long-term foreign residents in Jakarta dispelled the notion that now reelected, Jokowi will be “unfettered” and can now pursue the types of reforms that bring 6-7% growth. Current ministers I spoke with, off the record, told me to expect more professionals in the next Cabinet, a continued emphasis on building infrastructure, and a major new priority to upgrade “human capital”.
Indonesia is looking for investors in education, especially vocational training. It is expected that an early move will be to open the education sector to foreign universities, but they would have to do so in special economic zones. No real talk of opening the health sector to foreign investment or changing work rules for professionals, allowing, for example, foreign educated doctors to practice. No one I met believes there will be a serious revision to the 2002 labor law, long an in impediment to labor intensive manufacturing investment. Nor is anyone predicted the same for the 2009 Mining Law, which remains an impediment to foreign investment. In fact several energy executives I met do not believe the President wants foreign investment in the sector at all. Furthermore, no one I met with expected any fundamental change to how judges are chosen, and how the court system operates. Regarding implementing the sweeping 2016 Halal Law, no one I spoke with had confidence the government had a solid plan to really implement it as written, given the lack of bureaucratic readiness and the realization of how costly creating the thousands of new certificates would be. If Indonesia believes it can steal from Vietnam’s FDI, most executives I met say “think again”. That said, these same people acknowledge the country’s size, solid macroeconomic management, and young demographic will remain attractive for many investors, especially capital market players.
President Jokowi remains highly influenced by the Minister for State Owned Enterprises, Rini Soemarno, and the Minister of Finance, Sri Mulyani. Expect more consolidation among the SOEs into holding companies that can be utilized to reform the behavior of the private sector. This isn’t necessarily new for Indonesia which has always practiced state-driven capitalism. But, in the late Suharto era there was an impulse (now dormant) to privatize SOE’s. But viewing the arc of Indonesia economic policymaking for the past 50 years it may be surprising to some how strong the paternalist state has persisted even as the private sector has grown. When asked about this, the director of one state owned enterprise I met with told me his job was to “bring a more profit-oriented and efficient management” to his company. He advised foreign firms trying to enter Indonesia to voluntarily consider seeking a partnership with an SOE, something they wouldn’t normally do. I take his remark seriously as a sign of Indonesia’s future direction. Other key comments I heard:
- Most firms still experience modest sales growth, but profit margins are shrinking
- The Indonesian government has limited capacity, it remains difficult to raise money in domestic currency do limited hedging.
- Surveys of foreign business: business conditions have not changed much in last few years; no one believes regulatory conditions are getting better.
- The service sector is doing well as it is not under burdensome regulation
- Manufacturing competitiveness remains problematic.
- Cabinet shuffle could occur as early as June.
- Jokowi values stability over reform and would likely support a $50 million local investment to create 500 jobs then a $500 million foreign investment in the same sector that would create 5000.
The business sector (both local and foreign) laud the Jokowi’s government accomplishments:
- Protecting secularism while integrating populist Islam
- Continued support of anti-corruption efforts via the KPK not just the police.
- Maintaining a low inflation environment
- Initial removal of energy subsidies, since reinstated but expected to be modified again
- Infrastructure performance: strong with road building, less well with ports and electricity