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New power balance poses risks to Indonesia's economic policies

Publication Date : 10-04-2014


The generally peaceful election may yield a short-term upside impact on financial markets but there is growing concern about the effectiveness of future economic policy-making, after quick counts indicated heavily fragmented factions in the House of Representatives.

The quick counts on Wednesday revealed the balance of power in the House may be evenly distributed, presenting a complex situation for the next administration if it wants to push through crucial economic policies.

The election’s frontrunner and possibly the next ruling party, the Indonesian Democratic Party of Struggle (PDI-P), is estimated to have pocketed only about 19 per cent of the votes, below the party’s 27 per cent target.

Countless surveys indicated a landslide victory for the PDI-P, leading to a potentially more stable coalition of the majority. But this is not the case.

The PDI-P’s share of the vote, as indicated by the quick counts on Wednesday, was not too far ahead of the Golkar Party and the Gerindra Party, which were estimated to have garnered 15 per cent and 12 per cent, respectively.

President Susilo Bambang Yudhoyono’s ruling Democratic Party, which secured 21 per cent of the vote in the 2009 legislative election, has frequently encountered difficulties from its House counterparts when seeking to introduce important economic policies, with prolonged negotiations leading to inefficient policy-making.

“A coalition is required if the next government wants to govern effectively,” Destry Damayanti, chief economist with state-run Bank Mandiri, said regarding the election’s quick-count results.

“Big parties such as the PDI-P and Golkar must not compete against each other. They should unite for Indonesia’s interests in the long run.”

But forming a coalition with too many parties may also be a double-edged sword, as it could pave the way to backdoor political haggling, to acquire concessions, normally in the form of ministerial posts or projects funded by the state budget or state companies.

At least 18 of the 34 ministers in the current administration have solid party political backgrounds.

“History may repeat itself if the next Cabinet is once again dominated by politicians rather than professional technocrats, who may be deemed the best for the jobs,” said Latif Adam, an economist with the Indonesian Institute of Sciences (LIPI).

“The coalition may be an entry point for transactional politics,” he said, adding that the diverse political landscape increased the country’s need to secure a firm, bold leader, someone equipped with savvy political skills. “We need a president who is not only clever in formulating economic policies, but also has the firmness and better negotiation skills to win over the House.”

The markets may also be spooked by the possibility that the PDI-P may put economic issues on the back burner.

This is because PDI-P chairwoman Megawati Soekarnoputri, who is still a powerful figure within the party, is deemed to have poor economic credentials following her stint as president.

When Megawati served as president from 2001 to 2004, also the last time the PDI-P was the ruling party, her economic policy views were “less definitive”, and her tenure was marked by slow economic growth and high unemployment, noted Lim Su Sian, an economist with the HSBC Bank in Singapore.

“Megawati has never been a noted reformer, neither in office nor as head of the party,” she said.

There could also be an unwanted shift in policy that may deter portfolio investors. Indonesia’s stance over its fiscal and monetary policies, which focus on stability over growth, may shift to the opposite direction if and when the PDI-P takes over, analysts have warned.

“As the macroeconomic stability-growth trade-off becomes more apparent, Bank Indonesia’s [BI] independence in terms of monetary policy could be greatly tested, given

that the PDI-P is unlikely to want to see a slowdown in growth,” commented Enrico Tanuwidjaja, an economist with Japan-based fund manager Nomura.


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