Investors hopeful but cautious about Indonesia election

Traffic along Jakarta's main streets has become worse in recent months.

Still, when the man responsible for managing the Indonesian capital was named a presidential candidate on March 14, the stock market rallied to its largest one-day gain in six months.

Residents are willing to forgive the gridlock, observers note, because it is due to construction of an MRT system that finally got off the ground last year after numerous delays.

And investors appear equally hopeful that despite the short-term uncertainty of an election year, a change of national leadership will lead to more decisive improvements to infrastructure across the archipelago.

"One can be cynical about elections, believing that no matter who wins, little will change," Mr Wuddy Warsono, country head for Indonesia at brokerage and investment bank CLSA, told The Straits Times.

"On this occasion though, the market seems to think that Jokowi can make a great deal of difference," he added, referring to Mr Joko Widodo, the Indonesian Democratic Party - Struggle's (PDI-P's) presidential candidate and the front runner in recent opinion polls. President Susilo Bambang Yudhoyono cannot stand again by law, and his outgoing administration has come under criticism for failing on the reform front.

Mr Anton Gunawan, chief economist at Bank Danamon, said there is more at work in the stock market rally and the improving economy than just the "Jokowi effect".

Recent improvements in the current account deficit have helped, he said.

However, he added, political factors are also at work.

Although the rally in the Jakarta Composite Index has since cooled down, in line with global conditions, economists say there is much optimism that a new government will adopt decisive policies to take South-east Asia's largest economy forward.

There is wide expectation that a PDI-P-led coalition - which many expect to form the new government come October - will have fewer parties than the existing six-party ruling coalition, and this will give the government more power, he said.

He believes it will have a freer hand to appoint technocrats over politicians to lead key economic ministries.

Analysts say one of the first challenges facing the new president would be to reduce the heavy burden that fuel subsidies exert on the economy.

Such subsidies, which are projected to hit 210 trillion rupiah (S$23.4 billion) this year - out of a total government budget of 1,842 trillion rupiah, could be diverted to education, health and infrastructure instead, economists say.

Professor Gustaf Papanek, president of the Boston Institute for Developing Economies and a former adviser to president Suharto's economic team and other governments, said reducing these subsidies will be painful, but necessary.

"The next leader should do this within the first year after getting elected. Your political capital is at its highest," Prof Papanek told The Straits Times.

But the PDI-P also has a strong pro-people agenda, and one challenge is for it to convince the majority of its supporters that fuel subsidies disproportionately benefit the rich.

It has also been against fuel subsidy cuts in recent years, on the ground that the poorest are most disadvantaged by them.

Observers believe, however, that longer-term investors will hold out for further signals of such reforms after the election season is over.

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