Economic Update

Published 22 Mar 2019

Indonesians will go to the polls on April 17 to elect their head of state for the next five years, with the two candidates on the ballot paper offering differing views of how the country’s $1trn economy should be managed.

While holding different policy positions, the contenders in Indonesia’s presidential election are very familiar, with incumbent Joko Widodo facing off against the man he beat in the 2014 election, retired general and businessman Prabowo Subianto.

Widodo has chosen Islamic scholar Ma’ruf Amin as his running mate, while Prabowo has teamed up with businessman and former deputy governor of Jakarta Sandiaga Uno for the campaign.

Prabowo is seen as nationalist in his economic approach, advocating self-sufficiency in food and energy, saying that Indonesia needs to stand on its own two feet, rather than depend on overseas investment, and imported food and fuel products.

This position would be at odds to some extent with recent government efforts to encourage foreign direct investment (FDI) and liberalisation of the economy. These include expanding coverage of tax holidays in 18 sectors, reductions in corporate tax rates for medium- and large-scale investors, fast-tracking bureaucratic processes and easing restrictions on foreign investments in key sectors such as toll roads, education, e-commerce and hospitality.

Despite these efforts, FDI fell from $30.5bn in 2017 to $27.9bn last year, though it is forecast that investment flows will increase after the April poll, once the political situation is clarified.

See also: The Report – Indonesia 2018

Infrastructure delivery and costs take centre stage

One area where there is a significant gap between the two campaign platforms is infrastructure. This has been a keynote of President Widodo’s term in office, with up to $400bn worth of developments proposed, many designed as public-private partnerships.

The Prabowo campaign has been critical of the president’s infrastructure programme, both on the grounds that delivery of many projects is well behind schedule, and that funds could have been better spent improving agricultural output and cutting reliance on food imports.

Despite having scaled back some of the planned infrastructure outlays over the past year, with some of this funding being used to hold down energy prices, President Widodo’s administration maintains such investments are essential to boost economic competitiveness, including in sectors such as agriculture.

Tax proposals designed to stimulate future growth

Economic growth has been steady over the current presidential term, averaging just over 5% each year since President Widodo came to power in 2014. In a sign that the trend is expected to continue, the Asian Development Bank forecasts GDP to expand by 5.3% this year, the same rate as 2018.

While short of the 7% targeted by the president in his first term, the rate of growth is well above global averages, with at least some of the economic expansion fed by infrastructure investment.

Prabowo, by contrast, has put forward an alternate policy platform to stimulate the economy, proposing to cut corporate taxes by between 5% and 8% as a means to boost investment and growth. He has also proposed lowering personal income tax for many Indonesians, while aiming to raise the top rate for the wealthy.

In addition, Prabowo has said he will increase the wages of civil servants when elected, while expanding support for farmers and rural communities to boost agricultural output and roll back rising imports of food and basic commodities.

Despite cutting tax rates, the Prabowo camp says state revenue will increase under its plans, as more Indonesians will be willing to pay their taxes if compliance costs less. This predicted hike in revenue would, according to Prabowo, lead to lower state borrowing, which has increased under President Widodo, and allow for more expansive budgetary spending.

Policy convergence on fuels and energy

While there are policy differences between the two candidates, they also share common ground over some key issues. This includes the increased use of biofuel in Indonesia’s energy mix and the reduction of hydrocarbons imports.

During the presidential debates, President Widodo advocated the development of B100, a fuel made entirely from palm oil, with up to 30% of the annual 46m tonnes of palm production to be directed to the energy market.

Prabowo too came out in favour of greater use of biofuels, with his campaign proposing to plant sugar cane on degraded farmland to provide more feedstock for renewable energy.

The two candidates also both came out in favour of greater domestic control of Indonesia’s natural resources, rather than ownership or majority shareholdings by foreign investors.

The natural resources issue has been one area for which President Widodo has taken a somewhat economically nationalist approach in his first term. He successfully attained a majority share in the lucrative Grasberg mine for the state-owned mining firm Inalum, as well as mandated that oil producers sell crude to refineries operated by state-owned Pertamina, which is also assuming bigger stakes in key oil blocks as concessions operated by foreign oil firms expire.   

Double elections stoke fears of information overload

In another factor potentially shaping the vote, the April poll is also the first time that the presidential and legislative elections will be held simultaneously.

This will see candidates at both levels of national government competing to get their economic and policy messages across to the electorate, with voters having to contend with an increased flow of information at the regional and national levels.

While economic growth and project delivery have not met the ambitious headline targets promised by President Widodo in his first term, clear progress has been made in infrastructure development and the cultivation of innovative digital industries, and he remains the frontrunner in the 2019 campaign race, according to recent polling.