Previous Quarterly Editions
Expropriation Risk: 80 84 83 80 Political Violence Risk: 64 68 69 64 Terrorism Risk: 58 57 55 53 Exchange Transfer and Trade Sanction Risk: 60 61 62 58 Sovereign Default Risk: 48 47 46 46
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For weeks after the April day on which Indonesia held simultaneous presidential, legislative, regional and local elections, defeated presidential challenger Prabowo Subianto continued to question President Joko ‘Jokowi’ Widodo’s re-election. The former general only accepted the result in late June after the Constitutional Court rejected his petition to overturn the results. Since then, he has sought a role in Jokowi’s government as a link to the various conservative Islamic groups that provided the main source of support for his challenge. Jokowi himself, both before the election and afterwards, has been moving towards an accommodation with a more Islamic agenda, raising concerns among his more secular supporters as to how this may affect policies during his second five-year term. Nevertheless, the conclusion of the long election campaign looks set to be followed by a period of relative political tranquillity as attention returns to the impact of local and international issues on the country’s economic prospects. Growth was at its lowest level for two years in the second quarter, with the 5% figure largely reflecting collateral damage from the US-China trade dispute and leaving growth below Jokowi’s target for this year. Falling prices for key commodities, notably coal and palm oil, contributed to the decline and emphasised Indonesia’s dependency on major trading partners such as China. Domestic demand is also slackening, prompting the central bank to ease interest rates in July in a bid to boost economic activity. There is growing concern that government revenues are no longer sufficient to finance Jokowi’s efforts to develop the economy through an extensive programme of upgrades and improvements to the country’s infrastructure. Following re-election, one of his first pledges was to invest more than 400 billion dollars in infrastructure projects. While the ambitious road construction programme launched during his first administration is making progress, notably in Java, existing rail and power projects are only moving ahead slowly. A major power cut that affected the capital Jakarta in early August highlighted the problems facing that sector. The same month Jokowi expressed his determination to move the country’s administrative capital to an as yet undisclosed location in Kalimantan on Borneo island but this is widely seen as a combination of optimism and political theatre. It has mainly served to draw attention to the worsening traffic and pollution problems in Jakarta.
With the conclusion of a presidential election campaign that saw both candidates play up the theme of economic nationalism, the rhetoric about the control of the country’s resources has subsided in recent months. However, there is no indication that Jokowi will moderate the increasingly antagonistic stance towards the extractive sector that developed during his first term in an effort to retain or attract further overseas investment. One exception to the growing concern about government policy may be China, whose major mineral and energy companies can afford a different risk tolerance to Western private investors. The president is likely to keep his pledge to reduce foreign ownership caps in some sectors and cut corporate taxes. A row over higher EU tariffs on Indonesian palm oil, and Jakarta’s threatened retaliation on EU dairy products, should not derail talks on a free trade deal.
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There have been no serious incidents of political unrest since post-election protests in May questioning the legitimacy of Jokowi’s victory. The opposition is no longer mobilising mass protests in support of a conservative agenda, in part because of the president’s gravitation towards this position. Instead, the main concern now, although still relatively small, is the possibility of political unrest emerging from any sustained economic downturn. August saw an outbreak of violence in the provinces of Papua and West Papua following the arrest and apparent mistreatment of several students who were charged with disrespect for the national flag. The government sent in 1,200 extra security personnel and blocked internet access in the area, concerned that protests about treatment of the students could re-ignite long-standing calls for Papua’s independence.
There were no serious terrorist attacks in key population centres either before or after the April elections, reflecting the intensive counter-terrorist operation that surrounded the polls. However, the security services continue to worry about the Indonesia-based Jamaah Ansharut Daulah (JAD), which has aligned itself with Islamic State. In June, Indonesian police arrested 34 suspected JAD militants in Central Kalimantan province under a newly expanded anti-terrorism law. The JAD cell had fled there from Aceh province after the group was disbanded in 2018. With several hundred Indonesian nationals known to have served with Islamist groups in Syria and Iraq, the security authorities are concerned that an unchecked return of these experienced fighters could transform poorly resourced local terrorist cells into a major threat. The task of repatriating hundreds of Indonesians currently in refugee camps in Turkey or who fled to Iraq after the collapse of IS in Syria is thus being handled by Indonesia's National Agency for Combating Terrorism.
The concerns over capital outflows that led the central bank to raise interest rates six times last year had eased sufficiently by July for the bank to cut its key policy rate by 25 basis points to 5.75%. The bank has indicated that a further cut may be possible before the end of the year, depending on the impact of US-China trade tensions. In an effort to reduce dependence on external borrowing, the finance ministry is studying ‘diaspora bonds’ to attract money from the country’s large number of overseas workers. The rupiah stabilised after the elections and has been showing some resilience against the dollar, while core inflation, which excludes seasonal price fluctuations, stands at 3.2%, comfortably within the 2019 target band of 2.5-4.5%.
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Total foreign debt stood at 386 billion dollars in July, up 7% year-on-year. However, the government portion is less than half that total and, at 36% of GDP, is well within the legally mandated ceiling of 60%. Government debt, much of which is held by overseas interests, rose 3.9% at the end of May reflecting the issuance of global bonds but this year’s budget deficit should be within projections at under 2%. Foreign exchange reserves remain steady at around 125 billion dollars.
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