The Indonesian economy is shaping up to be the key election issue for 2019: Who benefits and who suffers?

The Indonesian election is still seven months away. But the issue that will define the next seven months is already beginning to take shape.


Joko Widodo’s challenger, retired army general Prabowo Subianto, unleashed a flurry of barbs at the incumbent’s management of the Indonesian economy. “We are gravely concerned with the endless weakening of the rupiah”, Subianto told the Straits Times, “it’s becoming a burden on our national economy”.

Is Indonesia headed into an economic crisis?

Subianto’s comment comes after the rupiah’s value has tumbled in recent weeks. It has reached the lowest value since the 1998 Asian Financial Crash, at almost 14,930 per U.S. dollar.

(Source: XE)

The planned US Federal Reserve interest hikes have hit the rupiah. Investors have sold assets within the country in favour of purchasing in the American market. Indonesia is also running both fiscal and current account deficits.

Despite the currency devaluation and deficits, Indonesians do not need to panic just yet. The conditions that brought on the 1998 crisis are not present in the Indonesian economy of today.

Firstly, Indonesia maintains a net capital inflow. Investors are still drawn to ASEAN’s largest economy.

Secondly, Bank Indonesia (BI) has much healthier foreign currency reserves. Today, it holds around US$118 billion. In 1998, it had just US$24 billion. This will provide leverage to prop up the rupiah, as well as a debt cushion to finance imports.

Indonesia’s debt-to-equity ratio is also far more favourable today. In 1998, it had swelled to more than 100%. It now sits at 29%. The country’s second-quarter GDP has also remained strong at 5.3%.

Subianto still sees an opportunity

Although Indonesia’s economy is not in crisis, Subianto has spied a political opportunity.

He does not want to fight Widodo along the same religious lines that have characterised Indonesia’s recent gubernatorial elections.

Jokowi appointed Ma’ruf Amin as his running mate last month. Amin is a staunchly conservative Muslim cleric with limited political experience. His appointment was clearly a defensive move from Widodo. He wanted to protect his campaign in the event that his opposition stirred up religious sentiment.

This closed a door to Subianto’s campaign. But it opened another. Thanks to Amin’s appointment, Widodo now enjoys the support of seven parties, including two Muslim parties, the National Awakening Party (PKB) and the United Development Party (PPP). However, his political inexperience leaves the Widodo campaign vulnerable to attacks focused on policy.

Without a running-mate with a strong history of economic policy implementation, Widodo will have to rely on his own economic record to weather the storm.

Jokowi has a mixed record on the economy

The onus is now on Jokowi to defend his economic record. His opponents will put his economic policy under the microscope.

There will be no shortage of material. Since 2015, Widodo’s government has issued 16 economic packages designed to boost industrialisation. However, the packages have done little to push GDP growth, which has remained consistently at around 5%.

Widodo’s government has boosted the creation of special economic zones (SEZs), in an attempt to lift Indonesian industry and manufacturing. However, of the 12 SEZs announced, only four have materialised and are operational.

Another chink in Widodo’s armour will be the vast import-export gap. In July 2018, Indonesia’s trade deficit widened to US$2 billion, the largest trade deficit since 2013.

It appears Jokowi is pre-empting Subianto’s attack. He has increased import taxes on consumer goods in an effort to bring imports down and fill the domestic market with locally-produced goods. Importers of more than 1,000 items will now pay 7.5% to 10% in taxes, up from 2.5% to 7.5%.

But this quick-fix approach is unlikely to produce lasting results. When a government restricts imports, it reduces the country’s competitiveness in international markets. Rather than innovate, companies can rely on protectionist policies to assert dominance over the domestic market.

Who will gain the most from an economic-focused election?

Jokowi’s patchy economic record will leave him with few defences against Subianto’s barbs. He will likely tout the long-term economic benefits of his sustained investment in infrastructure. However, even this looks under threat in the current economic climate. The Energy and Resources Ministry announced a delay in US$25 billion worth of power projects.

There are economic positives that Widodo can highlight. His economic packages have helped alleviate red-tape and stifling regulatory barriers. Thanks to deregulation under Widodo, foreign direct investment reached a record high in 2017 of US$32.3 billion.

Under Widodo’s leadership, Indonesia has also improved its competitiveness ranking, and its sovereign bonds reached investment grade ratings from the three major credit-rating agencies.

On the economic battlefield, Jokowi is vulnerable but by no means defenceless. The coming months will be critical. If the rupiah continues to decline, dragged down by an erratic President Trump and his trade war with China, the Indonesian public may find Subianto’s criticisms of Widodo compelling.

The run-up to April 2019 will test Jokowi. His economic packages will be under the microscope. He may not emerge as a winner.

But whatever the outcome, Indonesian politics will benefit. Indonesia is gearing up for a political race which will be judged on policy. A welcome relief from the races of late.