The market has high hopes for President Joko 'Jokowi' Widodo's second term. (Antara Photo/Ismar Patrizki)

Market Riled Up With Reform Hopes as Jokowi Seems Set for Re-election


APRIL 18, 2019

Jakarta. What impact will President Joko "Jokowi" Widodo's likely re-election have on the Indonesian economy over the next five years? Market consensus on Thursday points to the upside.

Investors hope to see Jokowi continuing his reforms, especially to boost productivity in local manufacturing and services to counter tepid global growth, following successes in infrastructure development and improving the ease of doing business during his first term.

The Jakarta Composite Index closed 0.4 percent higher, briefly reaching an all-time high, on Thursday, a day after reliable pollsters all showed that the incumbent had won the election. The rupiah strengthened by 0.3 percent to 14,016 against the US dollar – its strongest level in more than a month. 

"This development would point to an environment of policy continuity, with a renewed focus on some of the reforms that marked his first term, including development of infrastructure and human capital, and a gradual reduction of bureaucratic red tape,"  Anushka Shah, vice president and senior analyst at Moody's Investors Service in Singapore, said in a statement on Wednesday. 

"This policy mix has been supportive for investment and broader stability in growth. A stable growth environment will, in turn, foster financial market stability, which is crucial, given the high share of foreign ownership in the bond market," Shah said.

Moody's upgraded Indonesia's bond rating from junk in 2017. In a subsequent upgrade a year ago, it lifted Indonesia one notch above investment grade. The country has now secured investment-grade status from three major global debt rating agencies, which the government hopes would strengthen the case for more foreign direct investment in the archipelago.  

The country's 10-year bond yield, which gauges investor interest in the country's debt paper, fell to 7.7525 percent from 7.7882 percent on Thursday, according to data from the Indonesia Bond Pricing Agency. Bond prices move inversely to yield. 

Investment bank Morgan Stanley agreed with Moody's assessment, believing that Jokowi is likely continue his reforms.

"In Jokowi's first term, progress was made in several areas, namely infrastructure development, fiscal reforms, improvement in the ease of doing business and social measures to reduce the poverty rate and inequality," Morgan Stanley wrote in a note to clients. 

"In terms of policy priorities for Jokowi in his next term, his campaign agenda suggests that he is likely to build upon his first term, focusing on industrialization through developing special economic zones and accelerating infrastructure development, continued fiscal reforms to raise economic competitiveness and institutional reforms to improve governance," the investment bank wrote. 

Morgan Stanley expects Indonesia to buck the global growth trend in 2019, with its gross domestic product growth seen accelerating to 5.3 percent this year from 5.2 percent last year. 

"Indonesia had previously enjoyed healthy growth from reforms after the Asian financial crisis and commodity supercycle," Morgan Stanley wrote. 

"With the latter over, policy makers need to embark on Structural Reform 2.0 to further raise growth sustainably without running into liquidity constraints and widening external imbalances.

"This would entail boosting productivity and competitiveness in non-commodity sectors, ensuring resources are spent on productive areas [e.g., infrastructure and education], keeping wage growth consistent with productivity growth and improving the investment landscape to attract FDI."