On 21 August, Indonesia’s Constitutional Court dismissed a challenge to the election of President Joko Widodo.
So what are the challenges facing the new President in government?
Although Indonesia is South East Asia’s largest economy, its position straddling the developed and developing worlds gives rise to a range of complex issues.
Four major issues the new President will need to address are corruption, the fuel subsidy, infrastructure development and foreign investment.
Corruption is an enduring difficulty for governance and economic growth. All political parties have been tainted by it. In 2013, Transparency International’s Corruption Perception Index ranked Indonesia 114 out of 177 states.
There are positive developments. The Corruption Eradication Commission (KPK) has actively pursued charges and convictions, including recently obtaining a life sentence against a former Chief Justice of the Constitutional Court. Similarly, domestic surveys reveal Indonesians are increasingly intolerant of corruption.
During the campaign, Jokowi condemned greed and corruption. As President, the challenge will be to lead a clean government, resist transactional politics and appoint technocrats to Ministerial posts, and facilitate an anti-corruption agenda despite resistance from vested interests, including in the Indonesian parliament.
Indonesia is a net importer of oil, with domestic fuel significantly subsidised. Since last year, the cost of the subsidy has skyrocketed as the rupiah depreciated by over 25% against the US dollar, contributing to a budget deficit and a record current account deficit.
In 2015, the budget forecasts the subsidy will cost 291.1 trillion rupiah (US$24.9 billion), more than a fifth of all expenditure and larger than the entire budget deficit (currently 2.3% of GDP).
Reform is required, not only to manage the budget and current account deficits, but also to manage domestic consumption and hence traffic congestion and environmental consequences. In 2013, the government reduced the subsidy, resulting in a 44% increase in petrol prices and widespread public protests.
During the campaign, Jokowi promised to further reduce the subsidy by 60 trillion rupiah (US$5.1 billion), although there are limited details as to how and when. As last year demonstrates, while many Indonesians accept action is necessary, it will be politically unpopular.
Indonesia needs over US$300 billion in infrastructure to drive social development and economic growth. A basic legal framework has been established, but regulatory certainty and co-ordination remain significant issues.
Jokowi’s official Presidential vision, mission and working program promised to construct 2,000 kms of roads, 10 new airports, 10 seaports and 10 industrial estates. In particular, Jokowi has emphasised strengthening maritime infrastructure, including developing a “sea highway” to connect the archipelago. The vision is promising, but mechanisms to address the regulatory and other structural impediments are yet to be articulated.
With Indonesia’s growth predicted to slow to 5.5% in 2014, Jokowi’s vision is for an ambitious target of 7% each year.
While much of Indonesia’s recent growth has been powered by domestic consumption, renewed higher growth also depends upon foreign investment.
Indonesia’s new foreign investment regulation released earlier this year opened up some business sectors to foreign investment, but it also restricted or closed other sectors. Against the background of the parliamentary and Presidential elections, the new regulation was not seen as a material advance for foreign investment.
Similarly, Indonesia also announced it would terminate its Bilateral Investment Treaty (BIT) with the Netherlands. It apparently intends to terminate all 67 of its BITs. It is uncertain whether the intention is to negotiate replacement agreements or whether this reflects renewed resistance to foreign investment.
As previously explored, it remains to be seen how Jokowi actually sees foreign investment in Indonesia. His approach will have a major impact on the future negotiation of any Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA).
If Jokowi and his administration tackle corruption and the fuel subsidy – whilst driving infrastructure development and foreign investment – a sound investment destination with much unrealised potential will only become more attractive.
Justin Fox is co-chair of the Southeast Asia Business Group.
Jared Heath is a Special Counsel currently seconded to one of Indonesia’s leading law firms, Soemadipradja & Taher (S&T) as Foreign Counsel. More information on S&T is available from its website.
Corrs is not licenced to practice law in Indonesia and this should not be construed as providing Indonesian legal advice. If you would like further advice, please contact S&T.
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