Although investors in Indonesian stocks received positive news from the USA after Federal Reserve Head Janet Yellen stated on Tuesday (15/07) that the US economic recovery remains incomplete therefore justifying the continuation of a loose monetary policy for the foreseeable future as well as solid economic expansion of 7.5 percent (yoy) in China during the second quarter of 2014, the domestic political context in Southeast Asia’s largest economy remains a concern. What are the latest political developments in Indonesia?
The Indonesian presidential election that was held on 9 July 2014 showed no clear winner. In fact both presidential candidates - market favourite Joko Widodo (Jokowi) and controversial former army general Prabowo Subianto - claim a victory based on different quick count results. Although the reliable quick counts (which have proven accurate track records in the past decade) all indicate a victory for Jokowi (by a margin of about five percentage points), the outcome remains uncertain as Indonesian politics are not free from money politics and corruption. On 22 July 2014, the General Elections Commission (KPU) will announce the official result but it is highly likely that the losing side will dispute this result, meaning that it will take up to late August 2014 before a final decision can be made (after a Constitutional Court ruling).
On various occasions the market showed that it supports reform-minded and “man of the people” Jokowi instead of Subianto who has been linked to human rights violations on more than one occasion during his military career. Moreover, Subianto has a corrupted background being a former Suharto crony (the inner circle around former President Suharto were able to establish large business empires due to their relation to Suharto). Lastly, Subianto stated on various occasions that he is not a supporter of democracy and would like to diminish the influence of foreign investors in the country’s natural resources.
Subianto has not been quietly waiting for the election result on 22 July. Instead he formed a coalition between seven Indonesian political parties (representing over half of seats in the Indonesian parliament), called the Merah Putih coalition (Merah Putih refers to the Indonesian flag), in an apparent attempt to ‘sabotage’ the next government in case Jokowi will be elected as president as it will make it tough for the ruling parties to implement reforms. However, political analysts claim that this coalition may break soon in case Jokowi is elected president. One example of how such a coalition can ‘sabotage’ the Indonesian political system was seen last week when a coalition of six political parties (all except for one party within this week’s established Merah Putih coalition) were able to pass a new law regarding the post of speaker of the House of Representatives (DPR). Previously, this post would automatically go to the party that secured most votes in the legislative election. This year that would have been the PDI-P, the clear winner of the 9 April legislative election and the party that was the first to announce Jokowi as its presidential candidate. However, after the passing of the new law, the post of House speaker has become an elected one which will probably make it impossible now to have a PDI-P speaker for the next five years.
Another controversial amendment (supported by the Subianto coalition) that passed almost unnoticeable (due to the focus on the presidential election) involves corrupted legislators. The amendment would make it necessary for law enforcement agencies, such as the Corruption Eradication Commission (KPK), to seek presidential permission first before investigating serving legislators. Ergo, the president can shield corrupted legislators. This is a highly controversial amendment as it is widely known that Indonesia’s House of Representatives (DPR) is one of the country’s most corrupt institutions.
For investors such political games and controversial amendments bring no positive market sentiments and - for the next week - Indonesian markets are probably only able to gain on international sentiments. The official Indonesian presidential election result on 22 July will be an important day. If Jokowi is declared winner, the benchmark stock index (Jakarta Composite Index) will probably go to an all-time high before profit taking kicks in (triggered by a possible legal dispute from Subianto’s camp or by investors returning to look at the true macroeconomic conditions of Indonesia).