APSN Banner

Assessing Indonesia's post-election economic policy direction

Fulcrum - March 1, 2024

Manggi Habir – The next president of Indonesia will have his work cut out for him on the economic and competitiveness front, even if he continues with many of the existing policies his predecessor will leave behind.

The final count of Indonesia's presidential and legislative votes will be officially released on 20 March 2024. Amid rising accusations of electoral irregularities and even fraud by opposing political parties, the current count shows that Defence Minister Prabowo Subianto is the presumptive winner. If the presidential election (PE) is decided in one round, investors' concerns over any political uncertainty in the transition of power in late October can be reduced. Instead, the focus is shifting towards the likely composition of a Prabowo-led cabinet and administration.

Throughout the PE campaign starting in late 2023, President Joko Widodo (Jokowi) was quite visible. Jokowi's tacit support for Prabowo and Gibran Rakabuming Raka (Jokowi's oldest son and Prabowo's running mate) led to criticism from the pair's opponents and civil society, even as it undoubtedly helped Prabowo-Gibran to victory last month.

In retrospect, Jokowi's economic policies and legacy also helped the winning candidates, who ran on a platform of continuity. In fact, even Prabowo's opponents Ganjar Pranowo and Anies Baswedan promised to varying degrees to continue with some of Jokowi's economic policies.

Among President Jokowi's policies that Prabowo would likely continue are industrial downstreaming (hilirisasi), regional development – in part comprising the building of the new capital city of Nusantara (Ibu Kota Negara, IKN) and the multi-phase development project for the IKN's environs in East Kalimantan, as well as the country's ongoing infrastructure building. There are plans to extend the China-built Jakarta-Bandung high-speed railway along the southern Java coast to Yogyakarta, and then further eastward to Surabaya thereafter.

So far, the Jokowi government's downstreaming policy has shown some results but mostly along the nickel supply chain, given the country's firm hold on the global nickel market. Indonesia's laterite nickel ore is currently channelled downstream into two streams: producing nickel pig iron, the feedstock used for producing stainless steel, and mixed hydroxide precipitate (MHP), which is used in lithium-ion (that is, nickel manganese cobalt or NMC) battery cathodes.

There will be no shortage of challenges faced by the new government. With electric vehicle (EV) production still in its early phase, EV car demand has yet to propel the EV battery sector forward. Hybrid vehicles are currently selling better than pure electric-powered cars. Then, there is the development of alternative non-nickel battery technology, using cheaper and more readily available lithium. In response to these factors, Indonesian EV battery producers are also preparing to source lithium from Australia.

Jokowi's ambitious IKN project has its own set of teething problems. With competing priorities for state budgetary funds, it is likely that the next government might delay the IKN's completion. The planned move of government ministries to the new capital, projected to start this year, could be staggered, for instance, with some ministries moving earlier than others. As foreign investors have been holding back until the 2024 election results are clear, the IKN plan has faced difficulty in attracting private sector and foreign funding. To resolve this problem, Jokowi's government is seeking funds from the Middle East, where there are apparently interested investors, as well as from neighbouring Malaysia and Brunei.

China, as Indonesia's major export market and a key investor in major infrastructural projects, including the country's nickel downstreaming, will remain important for a Prabowo administration keen on continuing with infrastructural progress.

Prabowo and Gibran also introduced their own economic policies during their PE campaign. These include a focus on food and energy security, to ensure Indonesia's self-sufficiency in these two strategic areas, and a social assistance programme in the form of free milk and lunches for school children, which will be funded by budgetary funds initially allocated for fuel subsidies. In Prabowo's recent People's Transformation Strategy book, he aimed to open up some four million hectares of new agricultural lands to cultivate essential crops such as rice, corn, soybean, sugarcane and cassava. On energy security, Prabowo's plan is to develop Indonesia's biodiesel and bioethanol production capabilities, along with the development of renewable energy sources, covering wind, solar and geothermal power.

Prabowo's free milk and lunch programme is an interesting but challenging concept to implement. If the funding comes from funds allocated for fuel subsidies, this translates to a drop in fuel subsidies and a corresponding increase in domestic fuel prices. Aside from being inflationary and hurting the lower-income segment's purchasing power, rising fuel prices remain a politically sensitive issue in Indonesia. At least one recent report suggests that the proposed free lunch programme could even "widen the budget deficit by as much as 0.33% of gross domestic product in 2025" if introduced.

Another programme mentioned in Prabowo's book is the forming of a "State Revenue Body", separating the Tax Office currently under the Ministry of Finance into a new institution. With more focused oversight, the intent is to improve Indonesia's tax ratio, which, at 10.8 per cent, is among the lowest in ASEAN.

The real test is whether all these policies, continuing from Jokowi or newly introduced by the next president, can propel the country's growth rate to the desired six to seven per cent per annum to reach Indonesia's targeted high-income status by 2045. Former Finance Minister Chatib Basri has suggested that this requires investment levels to reach 41-48 per cent of gross domestic product (GDP), while Indonesia's local source of funds falls short at just 37 per cent of GDP. Indonesia urgently needs more foreign investment and increased productivity, which means that the government needs to significantly elevate the country's "ease-to-do-business" rankings (now at 73 out of 190 countries), "human capital" (94 out of 169 countries), and "rule-of-law" rankings (68 out of 139 countries). It would be a tall order indeed for Indonesia's next leader to bridge all these gaps.

[Manggi Taruna Habir was a Visiting Fellow at the Regional Economic Studies Programme, ISEAS – Yusof Ishak Institute.]

Source: https://fulcrum.sg/assessing-indonesias-post-election-economic-policy-direction