Indonesia is the world’s third-largest democracy, but it has had only one directly elected president. On July 9 the country’s 187 million voters will elect a successor to incumbent Susilo Bambang Yudhoyono, who is barred from seeking a third five-year term. What once looked like a shoo-in for the popular Jakarta governor Joko Widodo, 53, has turned into a neck-and-neck race with his opponent, the wealthy former army general Prabowo Subianto, 62.
The election is seen as a watershed for a country at a crossroads. The archipelago’s $900 billion economy is Southeast Asia’s largest, but after years of robust growth, it has decelerated because of the unwinding of the global commodities boom and slower growth in its main market, China. Unlike neighboring Thailand and Malaysia, which diversified their economies by building a manufacturing base, Indonesia remains a commodities-driven economy. The country is the world’s largest exporter of thermal coal and palm oil and a major producer of copper, nickel, bauxite, tin and gold as well as oil and gas. “We now have no choice but to boost our manufacturing and services sectors,” says Sarina Lesmina, head of Indonesian research at CLSA in Jakarta.
Although Jokowi, as Widodo is popularly known, is a fresh political face with the reputation of a reformer, and Prabowo is perceived as the candidate of the establishment, there isn’t much of a difference between the two candidates’ economic policies. “Both candidates boast similar platforms, but the key is who is better in executing his plans,” says Lesmina.
Indonesia’s overleveraged economy suffered a huge setback in the aftermath of the Asian financial crisis in the late 1990s. The rupiah tanked, Indonesians poured into the streets demanding the ouster of President Suharto, a dictator who had ruled for 31 years. In the end, the International Monetary Fund led a $43 billion bailout from multilateral lenders and other donors. Suharto was forced to step down and the country gradually opened up its economy to foreign investors, selling state assets as well as financially troubled companies.
The Asian crisis set in motion political reforms leading to a new constitution and free elections. The reforms, combined with the country’s emergence as a key supplier of raw materials to China, unleashed a long period of growth. Indonesia’s gross domestic product has grown at a rate of 5.5 percent or more every year since 2002, making it a darling of foreign investors. Indeed, the Indonesia Stock Exchange is Asia’s best-performing market on a five-, ten- and 15-year basis. The market’s Composite Index is up 14.7 percent year-to-date, as of July 4.
Inadequate infrastructure, labor market regulations and low productivity have held back the push into manufacturing. “The problem is, Indonesia’s peers in the region are starting to become much more competitive,” says Shaun Levine, Southeast Asia analyst for Eurasia Group in Washington, D.C. The Philippines and Vietnam are now attracting investments that previously went to Indonesia. Despite being the world’s biggest market for BlackBerry devices, Indonesia recently lost a bid to Malaysia to host a BlackBerry manufacturing plant because of inadequate infrastructure. Earlier this year, Samsung Electronics Co., which had been looking to build a plant to make cell phone batteries in the country, switched to Vietnam because that country offered better investment incentives.
In the aftermath of U.S. Federal Reserve’s announcement that it would begin tapering asset purchases, Indonesia suffered as part of the so-called Fragile Five emerging-markets countries. Falling commodity exports had helped widened the current-account deficits, and $24 billion in fuel subsidies expanded its budget deficit. As the central bank moved to tighten monetary policy, it began choking off growth. The country’s growth rate slowed to 5.8 percent last year from 6.3 percent in 2012, and it is expected to decline further, to 5.3 percent this year.
Both Jokowi and Prabowo have articulated audacious growth programs through massive building of infrastructure. Projects worth $150 billion — mainly ports, roads, railways, power plants and water supply projects — could be added to the pipeline over the next five years. To help fund his ambitious development program, Jokowi plans to phase out fuel subsidies within five years and to exert better control over the budget, whereas Prabowo has pledged to tackle tax evasion to increase tax receipts from the current 12 percent of GDP to 16 percent.
Worryingly for foreign investors, both candidates have whipped up economic nationalism during the campaign. They have talked about imposing restrictions on foreign investment, particularly in the banking sector; reviewing trade deals; raising mining taxes; and implementing an export ban on unprocessed minerals. “You need to separate election rhetoric from reality,” says Levine. “At the end of the day, they both know the country needs foreign investments. I don’t see Indonesia closing down or putting up huge barriers.”
Sandiaga Uno, co-founder of Indonesia’s largest private equity group, Saratoga Investama, and one of many business tycoons backing Prabowo, says the former general has been misunderstood and misquoted. “He is a nationalist but is not against foreign investments,” says Uno. “Under a Prabowo government, Indonesia will seek to bring in more foreign investments because we need to build our infrastructure to be a more competitive economy.”
The two candidates couldn’t be more different. Jokowi, an engineer-turned-entrepreneur who built a furniture business before entering politics to serve as mayor of his hometown, Surakarta, and later governor of Jakarta, is the favorite of city folks and the middle class. “He is someone who has not climbed to power through the old routes — the military, struggle for independence or family connections,” notes Manu Bhaskaran, CEO of consultancy Centennial Asia Advisors in Singapore.
“For the first time in history, we have a candidate in Jokowi who doesn’t represent the elite, doesn’t control a political party,” says Levine. “While Indonesia has elected presidents in the past, they have mainly represented the interests of the elite.” Jokowi is also seen as a better economic manager following his stints as mayor and governor. “The skills he brought to those roles can be ported over to the national level,” says Bhaskaran. “He was a genius for debottlenecking long-stalled infrastructure projects in Jakarta and got unpopular things done, like removing squatters and roadside hawkers, quietly but effectively,” he notes.
Prabowo, a scion of a wealthy family who rose to become head of the army’s commando unit, is popular among the poor and in the rural heartland. His human rights record as an army commander has been contentious during the campaign. He was dismissed from the military in 1998 after a military board found him responsible for the kidnapping of student activists at the end of Suharto’s rule. As the establishment candidate, he represents a return of sorts to the Suharto era. Prabowo heads his own small party, Gerindra, which won 11.8 percent of the popular vote and 73 of 560 seats in the parliamentary elections three months ago. He also enjoys the support of the former ruling Golkar party of Suharto, which has 91 seats in parliament.
“Prabowo represents a side of Indonesia that yearns for a strongman, a leader who will be tough and decisive, who would stand up for Indonesia and reclaim its rightful place in world affairs, someone who would restore order and respect,” says Bhaskaran. “Though in the cities and among educated middle class, Indonesians can see through the rhetoric, in the rural areas his message of ‘decisive leadership’ is resonating, and that has helped close the gap with Jokowi,” says Levine. Yet he sees no danger of authoritarian rule if Prabowo wins. “Indonesians have gone too far down the path of democracy to turn the clock back,” argues Levine.
Jokowi is backed by former president Megawati Sukarnoputri and her Indonesian Democratic Party–Struggle (PDI-P), the biggest party with 109 seats in parliament. He also has the support of a number of smaller parties that together with the PDI-P have 38 percent of the seats in the People’s Consultative Assembly, or parliament. Prabowo has stitched together an impressive coalition of parties that has 62 percent of the seats. Being part of the elite, Prabowo is more likely to cut deals and do the necessary horse trading to move his agenda along, but Bhaskaran notes that “Jokowi too has shown a knack for consensus building and getting laws through an unfriendly Assembly in Jakarta.”
Markets that were pricing in a Jokowi victory have started nervously building in a higher risk of a Prabowo victory. “Once the election is over, things will settle down over time, and the country will move forward, as we saw with the Malaysian elections last year,” says Tai Hui, chief Asia market strategist for JP Morgan Asset Management in Hong Kong. “In the heat of the elections, things can sometimes look more difficult, but eventually people focus on what the new government can do for them.”
The election comes at a time when Southeast Asia has been grappling with slower economic growth and a rise in tensions with China. Over the past two years, Japan, Vietnam and the Philippines have had spats with China over disputed islands. Although neither candidate has any foreign policy experience, Prabowo spent part of his childhood in Malaysia at the home of then Deputy Prime Minister Abdul Razak (who went on to become prime minister, and his son, Najib, is now Malaysia’s prime minister).
Considering the growing geopolitical tensions in Southeast Asia as well as the recent military coup in Thailand, “the emergence of Prabowo may not be a bad thing,” says Bhaskaran. “While Prabowo will adopt a more muscular approach to foreign policy, I doubt that he will change the thrust of the policies in the region.”
Jim O’Neill, the former chairman of Goldman Sachs Asset Management who coined the term BRIC, is a “long-term optimist” on Indonesia, which, he says, alongside India, is one of the few large emerging economies in which the medium-term structural growth story remains intact with “fantastic” demographics. “What we need to see is stronger leadership with better governance and delivery for the masses and reduced corruption,” he says.