Post-election economic landscape in Indonesia

Amid slowing economic growth, higher budget deficit and increased exposure to external debt, the future of the domestic political landscape is showing some distressing signs.

The polarization of the political parties supporting the two pairs of presidential candidates, Joko “Jokowi” Widodo-Jusuf Kalla and Prabowo Subianto-Hatta Rajasa, are almost evenly split, indicating a divided House of Representative come October 2014.

Since the stakes of both presidential candidates are high, the bitter competition between them can already be felt. And if this enmity continues to be brought into the new House, political gridlock would ensue, making it difficult for whoever gets elected president to mobilize support for policy reforms that are needed to move the economy forward.

After taking office, whoever becomes president will face the immediate problem of saving the 2015 state budget from surging fuel subsidies. This year the fuel subsidies would exceed the 2014 budget by Rp74 trillion ($6.4 billion), a third more than the budget. The subsidy is flowing like uncontrolled flood jeopardizing the sustainability of the economy at a time when tax revenue growth is declining. It has to be reined in.

Both presidential candidates appear to support reducing fuel subsidies, but the magnitude and the method would likely be different.

Jokowi has apparently agreed to a gradual reduction of subsidies and he wants the money saved from the reduction of subsidies to be used to finance infrastructure. His vice presidential candidate, Kalla, was the force behind Susilo Bambang Yudhoyono’s decision to raise fuel prices substantially twice in 2005, when he was the vice president in Yudhoyono’s first term, a decision that saved the budget from bankruptcy and that made the macroeconomy more resilient, in the face of the impending global financial crisis in 2007-2008.

So Jokowi will have Kalla at his side when facing the consequences from such a decision.

Prabowo has spoken about the targeted fuel subsidy, to ensure that even if there are still subsidies, they should be targeted to those who really need it.

In his speech in the S. Rajaratnam School of International Studies in Singapore in April 2012, he viewed fuel subsidies in a wider perspective, as part of the overall national energy policy.

Given that Indonesian fossil fuel reserves will be depleted in a few years’ time, Prabowo would like to see renewable and other alternative energy such as geothermal, hydropower and biofuel be developed more vigorously. He proposed that huge areas that have suffered massive deforestation should be developed for biofuel development.

The draft revision of the 2014 state budget, which has just been submitted to the House, would undergo some changes not only with regard to the fuel subsidy but also resource reallocation and budget cuts.

For instance at the same speech in Singapore, Prabowo mentioned what he called “structural imbalance” of the economy, where the budget allocated for agriculture was only 3 percent of the total, whereas 60 percent of workforce worked in this sector.

“I am not proposing to increase the budget for agriculture to 60 percent. But maybe I would like to propose to allocate 10 percent of the total.” So if Prabowo is elected president, it is likely that the 2015 budget allocation would change significantly.

As both candidates are competing to appear more nationalist and populist in their campaign platforms, it is unavoidable that both have forcefully spelled out what they are going to do with natural resources management. Jokowi-Kalla plans to issue a government regulation in lieu of law (Perppu) to replace the existing Oil and Gas Law to improve legal certainty in the industry.

They view the law has created uncertainties after the Constitutional Court disbanded Upstream Oil and Gas Executive Agency (BPMigas), an agency created by the Oil and Gas Law.

It is not clear whether the proposed Perppu would be more “friendly” to foreign companies or to what extent it would be more nationalistic. However, Jokowi-Kalla propose more flexible fiscal incentives for the oil and gas sector, which would be based on exploration difficulties and areas where they operate, something that has been proposed by the oil companies.

The Prabowo-Hatta stance on foreign investment in natural resources industries is less compromising than those of Jokowi-Kalla. Fadli Zon, deputy chairman of the Prabowo’s Gerindra Party, said that if elected president, Prabowo would pursue renegotiation with foreign companies with the aim to get more benefits for the government.

Even though Fadli denied that nationalization against companies controlled by foreign interest is one of his party’s agenda, the hard line tone against foreign interest is prevalent in the Gerindra manifesto.

“The current situation has created foreign dominance in the ownership of the Indonesian economic sectors, putting the economic welfare on the sideline.” Gerindra Manifesto stated.

The foreign ownership issue is not explicitly spelled out in the Jokowi-Kalla agenda. Only in the vision and mission document submitted to the General Elections Commission, Jokowi-Kalla states that it proposes the restriction of the sale of national banks to foreign investors.

While Jokowi-Kalla wants to promote cooperation with international organizations including the International Monetary Fund and the World Bank, Fadli in a talk show in a private TV station recently was blunt in his rejection for cooperation with and assistance from the IMF/World Bank.

For Fadli and his allies, the fallout of the demise of the IMF-dictated policies on the economy during the crisis of 1997-1998 has not gone down to the trash bin of history. The hard feeling against the IMF among these people is still running strongly in their blood. No wonder then that rejection against the so-called neoliberal agenda which these people view as the basis for policy advice by the IMF/World Bank is so prominent in the Gerindra manifesto.

The manifesto rejects privatization of state-owned enterprises, reject trade liberalization and is in favor of more protection in trade policies.

If these policies are implemented, if Prabowo gets elected as president, Indonesia would face unpleasant questions from its trading partners and international organizations on its commitment to honor all agreements and its commitment to promote free trade.

The economic agenda of each presidential candidate would have different implications for the economy. Voters should scrutinize the economic agenda of each candidate in more detail during their campaigns.

Voters should think seriously about how the implementation of economic agenda of each candidate would affect their daily economic life. 

By Winarno Zain
 
The writer is an Indonesian economist. ― Ed.

(The Jakarta Post)

(Asia News Network)