Indonesia election uncertainty clouds fiscal outlook

Aerial view of a sunset sky charged with storm clouds and a lightning over Jakarta business district in Indonesia capital city in Southeast Asia
A two-round election is the most likely scenario, write Johanna Chua, head of emerging market economics at Citi Global Markets Asia and Helmi Arman, Indonesia chief economist at Citi Global Markets.

On 14 February, Indonesia will hold general elections and voters will head to the polls to elect the next president, vice president and members of the People's Consultative Assembly. What's at stake? The country’s industrial and investment policy as well as a prudent fiscal regime will depend on the electoral outcome. Our base case (though without high conviction) is that presidential candidate Prabowo Subianto wins in the second round.

A win by Prabowo appears to be the most likely scenario according to polls as well. Many have shown him in the lead, trailed by candidates Ganjar Pranowo and Anies Baswedan. Judging from these polls, a two-round election (February and June) seems likely. However, these surveys are fluid, and an unexpected one-round election remains a possibility.

Among the three presidential candidates, Prabowo appears to have the most populist campaign programme. He has made explicit campaign promises to allocate up to Idr450tn, or 2% of gross domestic product, to fund free lunches for school pupils nationwide, as well as increasing civil servant salaries to combat corruption. He also promises, as does Anies, to spin-off tax collection from the Ministry of Finance to a new agency.

Against this backdrop, we think that the new administration’s choice for finance minister would be closely watched by bond investors in assessing medium-term fiscal risk. In the event that a less well-known figure is selected in late October 2024, investors may need to wait a few months for clarity on the budgeting approach of the finance minister. This will likely be known by early 2025, when the government would have unveiled the revision of the 2025 budget that incorporates the new administration’s programmes.

In terms of the structural reform outlook, both Prabowo and Ganjar have pledged to continue President Joko Widodo’s programmes. These promises include ‘down-streaming of resource industries’ and the movement of Indonesia’s capital city to Kalimantan (with the latter being likelier under a Prabowo win).

That said, Indonesia is unlikely to see seamless policy continuity under either candidate, given that a political consolidation period might be needed in the first one to two years. Separately, Anies has touted a ‘change’ programme refocusing industrial development towards more labour-intensive industries, while being more lukewarm on the capital city project.

An unexpected one-round election could lead to a quicker or larger cut of the bond issuance target. We think that one reason for the government’s willingness to overfund the 2023 budget is to have a financing buffer given election uncertainties in 2024. These uncertainties could come from either the financing side (political risk perceptions worsen and are reflected in financing costs), the expenditure side (a tight race leads to a boost in various social expenditures in addition to what’s been already budgeted) or even the revenue side (tax refunds are accelerated ahead of the elections).

If the election unexpectedly ends in just one round, these uncertainties will most likely subside. And the expected cut to the 2024 issuance target could either be larger or at least announced sooner than July – as would be the case were the elections to conclude in June.

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