Previous Quarterly Editions
Expropriation Risk: 79 80 80 80 Political Violence Risk: 64 66 66 64 Terrorism Risk: 58 58 56 58 Exchange Transfer and Trade Sanction Risk: 60 57 57 60 Sovereign Default Risk: 45 45 47 48
TREND ▲ OUTLOOK ▲
President Joko ‘Jokowi’ Widodo announced in August that a leading Muslim cleric will be his vice-presidential candidate when he seeks re-election in April 2019. Ma’ruf Amin heads Nahdlatul Ulama (NU), Indonesia’s largest mass Muslim organization, and the choice is clearly intended to bolster his support among conservative Muslim voters. The president’s campaign is also likely to stress his pledge to ’safeguard our national resources’ and play up his government’s moves to nationalise oil and gas assets and acquire majority ownership of the huge Grasberg mine in Papua province from its US-based owner. Jokowi faces a stiff challenge next year from Prabowo Subianto, a former general, and his running mate, Jakarta’s deputy governor Sandiaga Uno. Both the president and Subianto appear ready to compete in condemning the influence of foreign commercial interests in the country, heightening the risk that populist and nationalist rhetoric may encourage a xenophobic response from some sections of the electorate. Both are in favour of tourism, however, although the earthquake on Lombok island in August and the earlier eruptions of Bali’s Mt Agung volcano have badly affected Indonesia’s two prime tourist destinations. The earthquake and tsunami that hit Sulawesi in September also raised questions about the effectiveness of the government’s response. June’s regional elections did not offer a clear guide to the outcome next April as they were largely dominated by parochial issues and personalities rather than national party politics. Nevertheless, the results suggest waning support for Jokowi despite his efforts to implement ambitious infrastructure projects, promote Islam, and increase benefits for retirees. This partly reflects the mobilisation of Islamic activists, notably in populous West Java, against the president and the normal loss of authority and support faced by a leader who entered office accompanied by high expectations. Nor has he been helped by the weakening currency and global trade concerns. With barely six months to go before the election, Jokowi may choose to embrace voter-friendly policies sooner and with more enthusiasm than he might have planned. While this would add to international concerns over the government’s spending priorities, Jokowi remains the preferred candidate of most investors as Prabowo retains links to the discredited Suharto era. After a strong start to 2018, the second half may be disappointing. A combination of rising US interest rates, the US-China trade dispute, and flat post-Ramadan domestic consumption mean the government’s 2018 growth target of 5.4% is unlikely to be met. The Asian Games, the world’s second largest sporting event, were held successfully in Jakarta and Palembang in August and September after substantial infrastructure spending.
TREND ► OUTLOOK ►
In July a state-owned mining company reached an initial agreement with U.S.-based Freeport-McMoRan Inc. to increase its share in Freeport’s local unit to 51%. PT Freeport operates the huge Grasberg copper and gold mine in eastern Indonesia’s Papua province. The deal, long anticipated and finally concluded in September, will help strengthen the president’s claims to be safeguarding the nation’s resources but will damage the prospects for investment by multinational companies. Other foreign extractive companies are also ending operations Indonesia, in part due to Jakarta’s policy of seeking full control over the country’s natural resources. Total, the French oil major, is reported to have declined to continue as a partner in the key Mahakam block after the government assumed full control of the concession at the start of 2018. In July it was also announced state-owned oil company Pertamina will take over operations in Chevron’s Rokan oil block concession when its lease expires in 2021, after efforts by the US company to extend the lease were rejected. The decision announced in August to make oil companies sell all their crude output to Pertamina, barring long-term contracts to offshore buyers, is part of efforts to curb the external deficit.
TREND ▼ OUTLOOK ▲
The regional elections in June were generally peaceful, with no serious incidents reported in major urban areas. The primary threat to public order ahead of the 2019 election will come from organised and well-funded supporters of the conservative strand of Islam, whose presence alone will unsettle many voters, foreign companies and investors. There is also the potential for unrest that is engineered by the president’s opponents to expose his weakness as a leader, hoping to trap him into either responding too timidly or cracking down too hard.
The authorities linked a series of terrorist incidents in May, including a wave of suicide attacks against churches and police facilities in the East Java city of Surabaya, to the Jemaah Ansharut Daulah (JAD) group, a loose confederation of extremists associated with Islamic State. JAD was banned in July while anti-terrorism legislation was amended to give the military a greater role. With the government already worried about the return of militant fighters from Syria, there is now real concern that foreign companies and their staff could be considered targets in future attacks.
The rupiah has continued to weaken, falling more than 6% during the first half of the year and likely to be kept on a downward trend by a combination of high US interest rates, China’s weaker currency and the impact of US trade tariffs. Despite a series of small rises that took the central bank’s key interest rate from 4.25% in May to 5.5% in August, the rupiah as come perilously close to 15 to the dollar, a level that would serve as a brake on much overseas investment. The government has responded with suggestions of measures to ensure dollars earned from exports remain in the country for longer. More encouragingly, inflation remains at the low end of the central bank’s target band of 3-5%.
Foreign debt is expected to reach 35% of GDP this year. While this level does not pose a threat to the economy, the doubling of debt owed to China under Jokowi may become a political issue ahead of the 2019 elections. Revenue from the recent tax amnesty has helped keep the budget deficit under the legal limit of 3% of GDP. Foreign exchange reserves fell slightly to 118 billion dollars in July following the central bank’s efforts to support the rupiah.
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