The Indonesian Constitutional Court has rejected all allegations made by Indonesian presidential candidate Prabowo Subianto, clearing the way for Joko Widodo (popularly known as “Jokowi”) to become Indonesia’s seventh president on 20 October 2014. This will be the first time that a directly elected president will hand over to another directly elected president and confirms that Indonesia is a healthy, functioning democracy. Whilst there are high expectations that the new president-elect would usher in fresh policies to reinvigorate the economy, in practice, this is likely to take some time. As of now, the new president-elect has yet to be formally sworn in or appoint a cabinet, and his coalition does not yet have majority support in the House of Representatives. It is likely to be several months before the impact of the new leadership is clearly felt in key economic (including foreign investment) policies.  

1. Election result and constitutional court challenge

Jokowi was announced as the winning presidential candidate by Indonesia’s General Elections Commission (“KPU”) on 22 July 2014, after securing 53.15% of the vote. Unsuccessful presidential candidate Prabowo Subianto, a former general, then brought suit in the Indonesian Constitutional Court urging the Court to (among other things) reject the official KPU tally due to alleged fraud.

On 21 August 2014, an unconvinced Constitutional Court rejected all allegations by unsuccessful presidential candidate Prabowo, clearing the way for a Jokowi presidency and ending the election uncertainty facing Indonesians and foreign investors alike. This is a significant affirmation of the rule of law in Indonesia.

2. Jokowi’s background

Jokowi is a former furniture businessman whose reputation has grown since becoming mayor of Solo (a small city in central Java) and then the governor of Jakarta. Jokowi is well known for being hands-on and has a clean image, managing to restart the long delayed development of a mass rapid transit system in Jakarta and taking significant steps to alleviate Jakarta’s seasonal flooding. He moved quickly to improve Jakarta’s dams and was able to relocate thousands of families living near them without substantial conflict.

3. Policy direction and impact for investors

The conclusion of Indonesia’s fourth democratic general election since the end of the Soeharto era, once again in a peaceful manner, is a key milestone for Indonesia and is likely to encourage investment over the coming months and years from both domestic and foreign sources.

Although on the campaign trail both Prabowo and Jokowi called for policies which could be seen as nationalist, Jokowi has expressed the importance of encouraging investment (both domestic and foreign), fair treatment of investors, and suggested that a more efficient approval system for business licenses would help foster the development of Indonesia. Indonesia faces significant challenges as the country seeks to build its infrastructure, battle corruption and narrow its current account and fiscal deficits.

A lack of majority support in the House of Representatives for the winning coalition (at this stage) may hinder Jokowi’s ability to implement his preferred programs and policies. He is seeking to gain support from parties in Prabowo’s coalition, but only the coming months will tell if he can gain enough support and the extent to which Jokowi will need to compromise both with regards to the composition of his cabinet and the shape of government policy.

In addition, the outgoing government is in the process of setting the country’s 2015 budget, a significant portion of which is allocated to fuel subsidies. Given Indonesia’s budget deficit, this will constrain Jokowi’s ability to divert funds towards infrastructure development, at least in the short term.

Ultimately, Jokowi’s governing style differs from the mainstream culture of government and changing decades of entrenched interests will be a significant challenge. Jusuf Kalla (the Vice-President elect), a former Vice-President during President Yudhoyono’s first term and part of the old elite group of politicians, will be a useful ally that could potentially bridge the gap in this respect. Despite the significant political challenges faced by Jokowi, we expect that recent events will help the country to make real progress on key issues such as infrastructure and corruption.

4. Legislative agenda of the current House of Representatives

The House of Representatives has a significant backlog of draft legislation which has not been passed. During the past few weeks, several news sources have reported that the House is considering pushing through a number of draft bills before lawmakers conclude their terms in 30 September 2014. These reports have suggested that some of these bills will be aimed at restricting the permissible level of foreign ownership in a number of sectors including banking, insurance and plantations. Most recently, the banking industry has expressed concern about pushing through major reforms to the banking legislation during this transition period without further proper industry consultation, and it currently remains unclear whether these draft laws will be passed into law ahead of 30 September 2014. We are monitoring the situation and will issue further sector specific updates in due course in relation to the potentially affected sectors.

Santi Darmawan