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Jokowi Uses Election Win to Tackle Indonesia Growth Risks

Indonesian Presidential Election 2019Indonesian Presidential Election 2019
Indonesian President Joko Widodo and his running mate Ma'ruf Amin pose for a picture while walking through a slum area where Jokowi as he is popularly known gave a press conference after The official government election results were announced on May 21, 2019 in Jakarta, Indonesia. Ed Wray—Getty Images
Indonesian President Joko Widodo heads into his second term with a stronger mandate to tackle the significant risks facing Southeast Asia’s biggest economy.

Jokowi, as the president is known, won the April 17 presidential race with 55.5% of votes, official results released on Tuesday showed. His margin of victory over his opponent Prabowo Subianto almost doubled from 2014, while parties in his coalition are set for a majority in the lower house of parliament. Prabowo hasn’t conceded yet and his supporters are planning protests, prompting authorities to lock down parts of the capital.

The president must now deliver on a reform agenda that includes plans for record spending on new infrastructure over the next five years. He’ll also need to attract foreign investment and navigate a worsening global trade environment, which is weighing on growth.

“Jokowi is well placed to push ahead with his economic agenda, which will center around developing infrastructure and streamlining byzantine red tape in order to attract investment,” said Hugo Brennan, principal political analyst with Verisk Maplecroft in London.

Here are some of the key economic challenges the president faces:

Faltering Growth

While Jokowi won’t be inaugurated until October, he’s already set about drafting plans to spend more than $400 billion on infrastructure, such as building new power plants and airports. As much as 40% of the total is expected to be funded directly by the government, 25% through state-owned enterprises and the rest through the private sector.

The president is betting on a spending boom to lift economic growth, which hasn’t hit the 7% target he set in his first term. The trillion-dollar economy grew 5.07% in the first quarter, the slowest expansion in a year.

Jokowi has ordered his cabinet to try to stimulate the economy by boosting investment and exports. With the budget deficit forecast at 1.84% of gross domestic product — well below the 3% ceiling — the government has room to pursue more expansive fiscal policies after a year of aggressive monetary tightening.

Glaring Deficit

Weaker global demand and the U.S.-China trade tensions have weighed on exports, pushing the trade deficit to its widest in at least a decade. That makes it more difficult for the government to rein in the current account shortfall from a four-year high in 2018, and means it remains reliant on foreign inflows to fund imports.

With global risks rising, foreign funds have once again began dumping emerging market assets, including Indonesian stocks and bonds. Investors will be watching if Jokowi can pursue structural reforms to lure more stable foreign direct investment instead. Brennan said investor sentiment in the mining sector will continue to be undermined by “resource nationalism and a clear preference for domestic state-owned companies.”

Inflation Outlook

After slowing to a decade-low in March, inflation is set to accelerate again and could pose risks if Jokowi decides to lift a freeze on gasoline and electricity prices enforced in 2016. The central bank — which has kept its key interest rate unchanged at 6% this year after six hikes in 2018 — expects inflation to stay inside the 2.5% to 4.5% target this year.

With steps to propel growth likely to take precedence over everything else, the president may maintain price controls and continue food imports to boost supplies. While he would be looking to Bank Indonesia Governor Perry Warjiyo to gradually cut rates to support the economy, the central bank is proceeding cautiously and wants to avoid a repeat of last year’s market rout.

Weakening Currency

After rebounding from last year’s sell-off, emerging markets are once again under pressure as sentiment sours on trade war worries.

The rupiah has fallen almost 3% against the dollar in the past month, while the yield on benchmark 10-year sovereign bonds surged 47 basis points in the same period as investors pulled out more than $900 million.