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Foreign Investors Welcome Jokowi Victory. Can He Deliver?

Indonesia’s president-elect promises to invest in infrastructure and raise wages but needs to overcome political resistance to enact his policies.

Foreign investors have cautiously welcomed the news that Joko Widodo, an anticorruption candidate with a business-friendly reputation, has been elected president of Indonesia. Unlike his jubilant supporters, however, they are not dancing in the streets.

Investors credit him with good intentions. They expect him to make a stab at sorting out many of the country’s worst problems, including poor infrastructure, corruption and high current-account and fiscal deficits. However, they question his ability to carry out his intentions, given the formidable political obstacles he faces.

“Widodo is definitely better than the alternative,” says Craig Botham, London-based emerging-markets economist at Schroders. The £268 billion ($455 billion) asset manager is the biggest fund manager in Indonesia. Widodo’s rival, Prabowo Subianto, who has called the vote count fraudulent and promised to contest the result in court, was regarded as an ally of vested interests who would have sustained rather than attacked the crony capitalism that is preventing Indonesia from resolving many of its problems. Botham warns however, that Widodo is “not a silver bullet.”

Analysts expect Jokowi, as the president-elect is popularly known, to attempt to boost spending on infrastructure, raise the national minimum wage by a substantial amount and root out corruption.

Infrastructure, in particular, is regarded by analysts as in need of drastic action, with Jakarta home to constant traffic jams and good roads lacking outside the capital. “Infrastructure bottlenecks are slowing Indonesia’s underlying growth rate,” says Puay Yeong Goh, economist at Neuberger Berman in Singapore. He cites the difficulty faced by Indonesian manufacturers in getting their products from factories to sea ports and airports. The manufacturing sector stands to benefit from Jokowi’s planned infrastructure spending — if it happens.

A raise in the minimum wage — doing on a national basis what Jokowi has done in Jakarta as governor — should boost domestic demand, says Goh. When Jokowi raised the minimum wage in Jakarta by 44 percent in January 2013, business profits fell initially because of higher labor costs but they have started rising again because higher wages increase demand, he says. Analysts expect Jokowi to seek to implement a similar sharp rise in the national minimum wage in 2015. Such a move should boost consumer goods sectors in particular, says Goh.

Conrad Saldanha, New York–based manager of the $244 million Neuberger Berman Emerging Markets Equity Fund, sees potential in Semen Indonesia Persero, the country’s largest cement producer, which would benefit from a resumption of infrastructure spending under the Jokowi administration. The company’s shares closed at 16,575 rupiah ($1.43)on July 25, up 17 percent for the year-to-date.

Improving Indonesia’s infrastructure is a pipe dream unless Indonesia manages to find the money to do it, though. At the moment the money is not there. Indonesia has targeted a fiscal deficit of 2.4 percent of gross domestic product this year, not far below the 3 percent maximum mandated by law. Jokowi plans to narrow this by increasing tax revenue through various measures, including allowing foreigners to buy apartments and taxing them for it. Most important, he has pledged to phase out the country’s enormously expensive fuel subsidies within five years and to spend the savings on infrastructure.

The reforms to the fuel subsidy regime will end the virtual monopoly in gasoline stations held by Pertamina, the state-owned energy company. For this reason, Saldanha of Neuberger Berman also likes AKR Corporindo, the logistics company that is the country’s largest private fuel retailer. The shares have inched up less than 1 percent this year, closing at 4,400 rupiah on July 25.

Even if Indonesia succeeds in reining in its fiscal deficit, the new government will still have to deal with a hefty current-account deficit, which the central bank forecasts will be 3 percent of GDP this year. Botham of Schroders says the authorities may rely on tight monetary policy, which would dampen import demand by reducing consumption. This could hit consumer goods stocks, he says. If so, it would counteract the positive effect of a rise in the minimum wage.

Although investors generally endorse Jokowi’s policies for reducing Indonesia’s deficits and raising its long-term growth rate, they question his ability to actually implement these policies. The president-elect’s coalition controls only 37 percent of the seats in the House of Representatives, and many analysts believe he will struggle to control his own party, the Indonesian Democratic Party–Struggle of former president Megawati Sukarnoputri.

As a result, many investors are adopting a skeptical wait-and-see stance. The stock market has already risen this year in expectation of a Jokowi victory, with the Jakarta Stock Exchange Composite index closing at 5,088.80 on July 25, up 19.1 percent year-to-date, leaving stocks trading at an average of 19 times earnings. Investors are reluctant to push it up further until they see evidence that Jokowi can deliver.

While waiting for Jokowi to take office in October, analysts and investors will be looking to see whether he appoints technocrats or populists to the top ministerial positions. Investors hope, for example, that he will retain the current technocratic Finance minister, Chatib Basri.

If Jokowi does show signs of being able to govern successfully, investors are ready to jump in. “Indonesia’s stock market is currently trading within the fair value range, and pushing through key reforms could result in an overall market rerating,” says Wing Kin Chow, Singapore-based Indonesia equity fund manager at Eastspring Investments, the Asian asset management arm of the U.K. insurer Prudential. “The shares of Indonesian banks and select real estate companies are already attractively valued but would do especially well under Widodo.”

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