What does Jokowi’s second-term hold for Indonesia?


Ari Pitoyo shares what he makes of Joko (‘Jokowi’) Widodo’s apparent victory, and where he sees opportunities in Indonesia.

Ari Pitoyo, Chief Investment Officer
Eastspring Investments Indonesia

Apr 2019

The initial results show a comfortable margin of victory for Jokowi. Indonesia’s election commission, however, will not declare an official winner for a further two weeks. Nevertheless, markets have reacted positively. With Jokowi’s re-election implying policy stability – an important point for investors – the Jakarta Composite index opened strongly (up more than 1.5%) a day after the election.

In the lead up to the polls, Jokowi and his challenger, Prabowo Subianto, campaigned on similar manifestos – the only difference was their approach.

In the end, we believe Jokowi’s track record, albeit mixed, seems to have given him the winning edge.

Jokowi’s track record

Economic growth has hovered around 5% annually since 2016, much lower than the 7% that Jokowi promised back in 2014. The country’s current account deficit has also been cited as a main vulnerability along with the rupiah.

On the other hand, Jokowi has pushed a few key reforms, one of which is slashing the fuel subsidies and freeing up money for economic growth. Notwithstanding this, inflation has been at a near-decade low.

At the same time, his performance on infrastructure development and jobs is commendable. In only five years, he has built 600km of roads (versus previous President’s record of 250km over 10 years), and created more than 10 million new jobs, surpassing his pledge of two million jobs per annum. This has subsequently reduced the unemployment rate to a near 20-year low of 5.3%.

On balance, there is recognition of the country’s improved economic fundamentals; Standard & Poor’s upgraded Indonesia’s sovereign credit rating to investment grade in 2017 – the first time in two decades.

What lies ahead?

Based on the preliminary quick count, Jokowi is now backed by a parliamentary majority for his supporting parties1. This will allow him to press ahead with infrastructure projects, together with other key initiatives such as human capital development (see Fig. 1). Moreover, the recent improvements in trade balance and decade-low inflation should encourage Bank Indonesia to ease its policy rates in 2019.

Figure 1: Jokowi’s key agenda2


But there are pressure points to monitor i.e. the Indonesian rupiah and the current account deficit. The rupiah is vulnerable due to the sizeable foreign ownership of domestic bonds and the corporates’ US dollar debt. Meanwhile, the current account deficit – which widened to 2.98% of GDP in 2018 (largely because of falling commodity prices) – will continue to exert pressure on the rupiah.

Implications for the equity market

Over the past five years, the MSCI Indonesia index has gained 48.5%3. A continuity in leadership and reforms is likely to be favoured by investors.

The MSCI Indonesia index is currently trading at 14.8 times its 12-month forward earnings, which is close to the 5-year average level (see Fig. 2). Whilst Indonesian equities are not as cheap as they were during last June’s lows, the market valuation remains within a reasonable band.

Figure 2: Price-to-earnings ratio for Indonesian (MSCI Indonesia) business sectors4


Post-election clarity will likely reduce market volatility, thus providing support to investor sentiment. Against the current macro conditions, we expect to see opportunities in the following sectors:

  • Financials and properties because of lower interest rate expectations
  • Telecommunications and utilities on industry consolidation
  • Consumer staples, a labour-intensive business, should benefit from the labour policy reform

Huge potential but challenges remain

Indonesia has enormous potential; it is amongst the fastest growing economies in the G20 Group, the world’s fourth most populous country and Southeast Asia’s largest economy.

But the journey ahead is not smooth. Many challenges remain.

For one, the source of funding remains an issue: either private participation or repatriation of domestic assets abroad is essential to fund the government’s infrastructure spending. Read more: Repatriating Indonesian capital: Show us the money.

The dearth of skilled labour is another challenge. Despite the country’s very favourable demographics, only 41% of the labour force has a high school education or above. Education and human capital development is key to the future of Indonesia. Read more: Indonesia: In Pursuit of Reforms.

Still, Jokowi’s push to improve the economy through investments in infrastructure and human capital should improve Indonesia’s global competitiveness over time. The continued pursuit of reforms should benefit the economy and the stock market as the economic multipliers slowly kick in.

If Jokowi can implement his agenda efficiently, it will reinforce Indonesia’s long-term economic development, thereby positioning the country as the world’s fourth largest economy by 20305.


Ari Pitoyo

Chief Investment Officer

Eastspring Investments Indonesia

1 Indonesian Democratic Party of Struggle (PDIP), Golkar Party, National Awakening Party (PKB), United Development Party (PPP), and Nasdem Party.
2 Bloomberg, as at 20 February 2019; Eastspring, 16 April 2019.
3 Bloomberg, total returns in Indonesia rupiah with income re-invested, from 29 March 2014 to 29 March 2019.
4 Thomson Reuters Datastream, citing data from MSCI Indonesia, latest data as at 29 March 2019, 12-month forward price-to-earnings ratio.
5 Standard Chartered. Estimates are in trillions of international dollars using purchasing power parity measures.

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