geopolitical risk ratings firm

Indonesia – Jokowi’s Credibility on the Line

18-Month: Divided Government 65% (50%)
Five-Year: Divided Government 70% (60%)

Turmoil Financial Transfer Direct Investment Export
18-Month: Moderate B (B+) B- (B) B
Five-Year: Moderate B- B- (B) B-

( ) Indicates change in rating.                                          * Indicates forecast of a new regime.

Years Real GDP
Growth %
 Inflation % Current
Account ($bn)
2010-2014(AVG) 6.0 5.5 -14.42
2015(F) 4.8 6.8 -20.30
2016-2020(F) 5.4 5.8 -13.90

Jokowi’s Credibility on the Line

Key Points To Watch…

  • President Joko Widodo, popularly known as Jokowi, is struggling to maintain his credibility less than a year after he took office promising to clean up a corrupt political system and shore up the foundation of an economy vulnerable to volatility in capital flows. Lacking the support of a legislative majority, Jokowi has been forced to engage in political horse-trading with the opposition, leaving him poorly positioned to wage a crusade against corruption. His freedom of action is further constrained by his dependence on the backing of the PDI-P, under whose banner he contested the presidential election. PDI-P leader Megawati Surkarnoputri, herself a former president, only reluctantly assented to giving her party’s presidential nomination to the more popular Jokowi, and since he took office, Megawati has applied pressure on Jokowi to govern according to her interests…
  • A brewing power struggle between Jokowi and Megawati has negative implications for political stability, including the danger that in his search for allies the president might turn to the military, which has no particular love for Megawati, and supports Jokowi’s hardline stance with regard to combating drug trafficking and Islamist extremism…
  • On the economic front, Jokowi recently affirmed Indonesia’s openness to foreign investment, but the government continues to pursue a program of import substitution and self-sufficiency aimed at reducing dependence on foreign capital. A ban on exports of unprocessed ores finally went into effect last year (with some exemptions), the quota for imports of Australian beef has been reduced, the negative list of areas close to foreign participation is expanding, and an effort is under way to bolster the influence of domestic firms in auto manufacturing and the production of telecoms components. However, the same factors that have deterred foreign investment—including poor infrastructure, a tangled bureaucracy, and corruption—will impede implementation of those plans…
  • Real GDP growth decelerated to 4.7% (year-on-year) in the first quarter of 2015, the slowest pace in six years. The underperforming economy has heightened the sense of risk-aversion among investors, resulting in a drop in the stock market and a weakening of the rupiah, which is the second worst performing currency in the region, beaten only by the Malaysian ringgit. A narrowing current account deficit may help to reduce Indonesia’s vulnerability to a rapid reversal of capital flows in response to monetary tightening in the US, but pressure on the rupiah is likely to persist…

Weak Reform Implementation Will Hamper Growth

  • Investors can expect to face difficulties stemming from the continuation of the economic nationalism that characterized some of the outgoing government’s policies. The PDI-P is an enthusiastic advocate of a strategy of economic self-sufficiency, a posture that points to a risk of protectionist trade and investment policies as the government attempts to nurture national champions…
  • In general, Indonesia has displayed a preference for multilateral trade initiatives pursued within ASEAN or unilateral trade liberalization, rather than bilateral trade deals. The country is not participating in talks for the proposed TPP, as doing so could require the government to implement policies that conflict with its efforts to promote agricultural self-sufficiency and downstream development in extractive industries. With the new administration’s legislative weakness casting doubt on its ability to implement trade reforms, it is unlikely that the US and other champions of the TPP will push very hard to get Indonesia on board at this late date…
  •  Over the medium term, reform will proceed in fits and starts, at best, and even when advances are made, the dilution of legislation by the opposition will minimize the beneficial impact. Real GDP growth will average just 5.4% per year over the five-year forecast period. Slower growth rates will complicate efforts to achieve fiscal targets, which in turn will increase the risk of bouts of currency volatility. Although the central bank will maintain a conservative approach to monetary policy, the weakness of the rupiah will be a persistent impediment to holding inflation in check, and the consumer prices will increase by an average of 5.8% per year through 2020.


Economic Forecasts for the Three Alternative Regimes

  Divided Government Reformist Coalition Military
2015 4.8 6.8 -20.30 5.1 6.6 -22.20 3.7 8.3 -34.80
2016-2020 5.4 5.8 -13.90 6.1 5.5 -11.10 1.6 17.3 -27.40

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