Indonesia’s Dangling Succession Splinters

Indonesian share gains fell to second place in the region as the Constitutional Court upheld furniture company executive turned mayor and Jakarta governor Jokowi’s 5 percent presidential margin over former General Prabowo, although his opponent may continue voting challenges and the associated party coalition will control a legislative majority. The winner’s campaign was often criticized as disorganized and lackluster, and cabinet picks will have to bridge the pool of seasoned technocrats and new generation official and business leaders signed up for his team. The fuel subsidy issue was mostly ducked in the platform and outgoing President Yudhoyono has rejected pleas to raise costs prior to exit with popularity no longer a concern. GDP growth dipped to a 5-year low around 5 percent during the contest and the current account deficit doubled in the last quarter to over 4 percent of output on non-energy balance gyrations. Despite middle class strides half the population remains in poverty earning under 2 dollars/day with education and infrastructure lacking according to the World Bank.  Jokowi enters office in October with a clean reputation but corruption lingers at the local levels with investment and spending powers, governance experts lament. Fixed outlays have been weak throughout the incumbent’s second term with regular rule shifts in agriculture and mining. Financial services have been a bright spot although consumer lending limits were circumvented and the central bank has warned of currency mismatch with external borrowing as the rupiah dips below 11500/dollar. Foreign investment in local debt is a record in nominal terms but eased to 30 percent of the total as new buyers are targeted as with an oversubscribed $1.5 billion sukuk in September at a 4.5 percent yield. The fiscal gap will be close to the 3 percent of GDP  target and the incoming president has vowed to tackle the fuel transfers which take 15 percent of spending “gradually” while diverting savings to other “pro-poor” programs. The environment is another area where domestic and international lobbies are out in force with increased deforestation set against the imperatives of rural job creation and survival.

 Relations with Malaysia featured occasionally during the poll period as condolences were extended over doomed jets forcing the state airline into bankruptcy. The sovereign wealth fund Khazanah will buy out minority shareholders for $250 million and undertake massive employee and route reductions. Prime Minister Najib’s approval standing has plummeted with the saga and his predecessor Mahathir repeated a pattern with a high-profile loss of backing. GDP growth was strong in Q2 at 7.5 percent mainly on domestic demand, but ratings agencies have warned of 85 percent of GDP household debt as the public ratio nears 50 percent. Mass transit and other large projects will add to liabilities, and on the external side the current account surplus is down as the capital account stays negative on outward direct and portfolio flows. The central bank’s minor rate hikes have thus far not discouraged non-residents controlling half of bonds but traders predict an unsteady future course.