By Indonesia, a vast archipelagic state located in South East Asia and Oceania, is preparing for its upcoming presidential election. The significance of this vote should not be overlooked.
With its 17,000 islands, including the prominent Java and Sumatra, Indonesia holds considerable geopolitical and global economic influence. Home to approximately 280 million inhabitants and encompassing around 1,300 ethnic groups, it is the world’s fourth-most populous country. Moreover, Indonesia is recognized as the third-largest democracy and bears the title of the 16th biggest economy globally, surpassing countries such as Turkey, Saudi Arabia, and Switzerland. In addition, its stock market has been one of the best performers over the past two decades.
Indonesia holds an essential position as the largest Muslim nation, maintaining positive relations with both the United States and China. Consequently, the capital city of Jakarta serves as a vital bridge between the East and the West.
This delicate balancing act between the world’s two largest economies has also safeguarded Indonesia’s commercial interests. However, the nation possesses an array of highly sought-after commodities. For instance, it is the leading producer of palm oil globally and holds the largest nickel deposits on Earth.
Since President Joko Widodo assumed office in 2014, Indonesia has experienced stable economic growth. Excluding the impacts of the COVID-19 pandemic, the country has consistently achieved a growth rate of 5% annually.
President Widodo’s vision to reduce reliance on agriculture has led to various initiatives. These include restricting the export of nickel ore and bauxite, thereby encouraging the establishment of domestic battery manufacturing and refining facilities.
Additionally, efforts to simplify employment regulations and open sectors to foreign investors have resulted in a significant increase in foreign direct investment. Notably, car companies, miners, and refiners have contributed to a record-breaking investment amount of $47 billion in 2023, according to Statistics Indonesia. This influx of investment has led to a notable surge in exports, transforming the country’s current account balance from a $30 billion deficit in 2028 to a surplus at present.
Indonesia’s economic achievements are remarkable and are the envy of many developed nations. The International Monetary Fund reports an impressive inflation rate of only 2.5%, an unemployment rate of 5.2%, and a general government gross debt as a percentage of GDP standing at 39%. These figures align with Ireland’s metrics and are notably lower than the United States’ corresponding ratio of 127%.
The presidential election in Indonesia holds immense importance in determining the nation’s future trajectory. The upcoming leader will have the responsibility of building upon the country’s economic success, maintaining diplomatic relations with major global powers, and ensuring the well-being of its diverse population.
Indonesia’s Investment Outlook
Investors have expressed their satisfaction with the current economic backdrop in Indonesia. The MSCI Indonesia Index, which can be tracked by U.S. investors through the iShares MSCI Indonesia ETF (EIDO), is currently nearing a record high. Over the past 20 years, it has risen approximately 380%, putting it behind only the S&P 500 (480%) and MSCI India (600%).
The yield spread between Indonesia’s 10-year government bond (BX:LDBMKID-10Y) and the equivalent maturity U.S. paper is currently at 245 basis points, according to FactSet. This is historically a tight spread for an emerging economy, especially when compared to India’s 10-year yield spread of 292 basis points with the U.S.
As a result, market participants are optimistic about the future. Their optimism is further fueled by the expected lead of former general Prabowo Subianto in the polls. Prabowo currently serves as the defense minister and has a wide lead over his competitors.
Prabowo has faced allegations from human rights groups regarding his involvement in killing civilians in East Timor during the 1980s. However, he has consistently denied these accusations. Notably, Prabowo is the preferred candidate of Wikodo, and his running mate is Gibran Rakabuming Raka, the mayor of Surakarta and the current president’s eldest son.
The two other main candidates in the election are Anies Baswedan, the former governor of Jakarta, and Ganjar Pranowo, the former governor of Central Java.
Citi strategists, led by Johanna Chua, suggest that an expected Prabowo lead on February 14 could strengthen expectations of continued industrial policies. However, there may be some uncertainty regarding Indonesia’s fiscal regime from a fixed-income perspective. Nevertheless, this is not anticipated to overshadow the near-term monetary policy outlook.
Some analysts argue that even the resolution of election uncertainty could bolster markets. If a presidential winner is determined after the first round, it is expected that markets will rally as election risks dissipate. Arjun Varma, an economist at Goldman Sachs, supports this view.
Quick exit poll results are expected to be announced on Wednesday, while the official result will be released at the latest on March 20. If no candidate secures more than 50% of the vote in the first round, a second round of voting will be held on June 26.
Comments