A BUCKET OF CHALLENGES AWAITS PRESIDENTIAL VICTOR IN INDONESIA
By Murray Hiebert
26 Jun 14. Before the July 9 presidential elections in Indonesia, polls suggest that the two candidates, former Special Forces general Prabowo Subianto and former Jakarta governor Joko “Jokowi” Widodo, are now in a statistical dead heat. But regardless of which candidate prevails, the new president will face a daunting set of challenges when he takes office in October.
Some of his biggest tests will be in regard to the economy, in which growth has slowed during the previous nine quarters. Highly respected finance minister Chatib Basri told Bloomberg recently that Indonesia’s economy remains “fragile” as a continuing current-account deficit has turned the rupiah into Southeast Asia’s poorest performer this year, while the rising cost of fuel subsidies has increased the 2014 budget shortfall and forced cuts in state spending.
Both candidates have promised to increase spending to boost the country’s woefully weak and overextended infrastructure, but they will face enormous pressure not to cut fuel subsidies to pay for it. Prabowo says he will keep fuel prices at their current levels but introduce procedures to guarantee that the subsidies are used only by the poor. Under his plan, car owners would be required to report their incomes when they register their cars. In contrast, Jokowi would cut subsidies and raise prices slowly over four to five years, which would save the government $30 billion.
Jokowi says he would build 1,250 miles of roads, 10 new airports, and 10 new ports using the money saved by reducing the fuel subsidies. Prabowo tells voters he would invest $60 billion a year to build infrastructure, including 1,875 miles of roads and similar lengths of railroads over five years. He would find the money by revamping the country’s tax collection architecture. Current government officials estimate that upgrading Indonesia’s roads and building needed power plants would cost about $150 billion over five years.
The space for foreign investors has shrunk during the decade under President Susilo Bambang Yudhoyono as the negative list excluding foreigners has grown. Many of these restrictions were aimed at protecting an inefficient domestic manufacturing sector. Foreign investment totals only 2.2 percent of gross domestic product, considerably lower than in many comparable economies. A few months ago, Jakarta announced that it will suspend most of Indonesia’s bilateral investment treaties with other countries, raising concerns among investors.
The role of foreign companies in the extractive industries will present another challenge for the new president. Mounting resource nationalism in recent years has resulted in new regulations limiting foreign investment in mining and oil and gas extraction. Both candidates say they will keep the mineral ore export ban that was imposed early this year to force mining companies to process raw materials in Indonesia before exporting them. Regardless of who wins, the new chief executive will come under pressure to nationalize or at least renegotiate the country’s extractive industry contracts.
In the election campaign, the candidates have taken quite different stands on this issue. “Our economy is dominated by foreign companies and the added value of our resources flows overseas,” Prabowo said during the candidates’ third debate on June 22. “We have to save our wealth.” He has repeatedly said he is prepared to renegotiate existing oil and gas and mining contracts.
In the second debate, Prabowo asked whether Jokowi would support renegotiating contracts. The former governor responded that signed contracts should be honored and not be renegotiated midway into their contract period. “We have to honor contracts we have already signed as part of our efforts to build trust [with] the investment community,” Jokowi said. But if a contract has expired, he said Indonesia should “recalculate” it. Jokowi