Standard Life Investments

Through the Lens

Opportunities and challenges in Jokowi's Indonesia

Opportunities and challenges in Jokowi’s Indonesia

  • The parallels between India’s and Indonesia’s heads of state
  • Reforming South East Asia’s largest economy
  • Finding opportunities amid the change

After a long and tempestuous election campaign, Joko “Jokowi” Widodo was finally sworn in as Indonesia’s new president on 20 October. Hopes are now high that Jokowi can follow in the footsteps of recently elected Indian Prime Minister Modi and rejuvenate his country’s fortunes.

The parallels between the two leaders are hard to ignore. Both came from humble backgrounds (Jokowi was the son of a carpenter; Modi a tea-vendor), and shot to nationwide prominence during highly successful governorships. Further, Jokowi and Modi ran on ambitious, far-reaching and pro-business reform agendas aimed at tackling their countries’ huge but ailing economies. And, lastly, both represented a break from politics as usual, winning support from the rich and poor alike, many of whom were tired of what they saw as ineffectual and, in Indonesia’s case, corrupt ruling elites.

Unlike Mr Modi’s landslide triumph, however, Jokowi’s victory was far from emphatic. So much so, that ex-general Prabowo Subianto, Jokowi’s main rival, only grudgingly admitted defeat after a series of constitutional court rulings. While the men have buried the hatchet - for now - many fear Prabowo, whose coalition controls the majority of seats in the national legislature, could hobble Jokowi’s reform agenda before it begins.

A time to be bold

Jokowi’s first order of business is to tackle Indonesia’s ruinous fuel subsidies programmes. Indonesians enjoy some of the cheapest fuel in South-East Asia – at the cost of 12% of the country’s entire budget. Mr Jokowi has pledged to trim the programme in order to free up money for his comprehensive - and much-needed - healthcare and education projects.

Like Modi, Jokowi has pledged to rebuild his country’s crumbling infrastructure, including new ports, roads and rail-lines. He has also promised to overhaul the country’s dilapidated power network.

Jokowi, meanwhile, plans to lower business costs and improve governance practices. This, according to Moody’s, could raise GDP per capita by 8% by 2019. He also has corruption in his sights, in the hope he can help rebuild confidence and attract foreign investment.

New kid on the block

However, Jokowi faces many challenges. The economy, which is heavily reliant on commodity exports, has stalled as demand from China has waned. Protectionist policies, including several proposed by Jokowi, remain rife. The country’s labour market, meanwhile, is rigid and uncompetitive. There are noted skills shortages in many sectors.

And then there are politics. Jokowi, while popular, is an outsider; the first president not to herald from a political family or the military. His coalition only holds 37% of seats in parliament, meaning he will have to forge alliance in order to make progress with his reforms. This could be difficult given his relative lack of experience.

Investors looking for change

What does all this mean for investors? At Standard Life Investments, we look for companies whose potential for positive change is underappreciated by the market.

One firm that fits that description is real estate developer Summarecon Agung. It looks well-placed to benefit from the new government’s infrastructure spending drive, while Jokowi’s pro-business policies should help cut red-tape and kick-start stalled developments. Further, some two million people are moving into urban areas each year, meaning demand for new properties will only grow.

It is investments of this type that we will continue to look for as Jokowi’s bold agenda unfolds.