Candidates must woo investors too

As Presidential candidates make generous pledges to build new roads, airports and irrigation systems, Indonesia is facing more immediate and stark economic challenges.

South-east Asia's largest economy has seen a ballooning fuel subsidy bill, pressure to cut spending and growth slowing to its slowest pace in five years.

"Manufacturing growth has slipped due to higher electricity tariffs and anticipation over a change in government, affecting the growth of the economy. Now, everyone is being realistic," Industry Minister M.S. Hidayat told reporters on Tuesday.

He revised the manufacturing growth forecast this year to 6.15 per cent from as high as 6.8 per cent, citing the absence of large labour-intensive investment in the first quarter as a reflection of investors' wait-and-see approach.

The rupiah breached 12,000 to the US dollar for the first time since February amid nervousness about the outcome of the presidential election on July 9, as the race has become closer than expected.

Many investors worry about the policies of the new government, especially as both candidates, front runner Jakarta Governor Joko "Jokowi" Widodo and former special forces general Prabowo Subianto, have been sketchy on how they would implement their key economic policies and tended to sound nationalistic to win support.

Short-term portfolio investors who react swiftly to market sentiments have shaken the currency with their movements, giving a clear indication that they believe Mr Joko to be more market-friendly than Mr Prabowo.

There is also the sense that Mr Joko's running mate and former vice-president Jusuf Kalla, a businessman, is more savvy about what businesses need while Mr Prabowo's running mate, former coordinating economics minister Hatta Rajasa, has a record of introducing protectionist measures.

Analysts point to how the market soared on June 10 after Mr Joko's better performance in the first presidential debate on the night before, with the Jakarta Composite Index (JCI) jumping 61 basis points, or 1.25 per cent, to 4,946.09.

But it lost 41.2 points, or 0.8 per cent, on Monday following a second round of debate that left no clear winner.

Dr Raden Pardede, vice-chairman of the National Economic Committee, warned that would-be investors could back out of Indonesia if they cannot accept the election results.

"There could be a sudden drop (in investments). How would the government respond to this? It is a dark scenario," he told foreign journalists recently.

A Deutsche Bank market survey of 70 investors last month and early this month showed 74 per cent of investors would buy into Indonesian assets and only 6 per cent would sell if Mr Joko wins. But if Mr Prabowo wins, 13 per cent said they would buy while 56 per cent said they would sell their assets.

Indonesia Investment Coordinating Board chief Mahendra Siregar sought to allay worries, saying that to date, he sees no negative effect on pending investments.

Still, European Business Chamber of Commerce chairman Jakob Friis Sorenson says whoever wins the presidency should not be complacent. Investors have options to set up shop elsewhere, like Africa or India, if the climate here is unfavourable, he says.

Echoing his views, Standard Chartered economist Fauzi Ichsan says long-term investors are waiting to see who the new president will be and to understand the economic policy of the next government before they make a decision.

"They would want to commit for 10 to 20 years and they need legal certainty, need political stability," he adds.

Economists warn that the new government will not have a honeymoon period when it officially takes over in October.

The first major test of its seriousness in carrying out reforms is when and how it reduces politically sensitive fuel subsidies that are a strain on government spending.

Mr Joko's team has talked about raising the price of subsidised fuel but Mr Prabowo's team is inclined to restrict access to subsidised fuel, which is harder to enforce.

The World Bank's Indonesia country director Rodrigo Chavez says economic watchers and investors will be "increasingly pessimistic if there is no strong decision on the matter" by the year end.

This article was first published on June 19, 2014.
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