Jokowi Widodo’s victory in Indonesia’s third-ever direct presidential election would be good news for investors, says Wing Kin Chow, Indonesia equities investment director at Eastspring Investments.
Jokowi has set out a promising reform agenda which if implemented efficiently, could help Indonesia achieve longer-term growth. When he was governor of Jakarta, Jokowi kick-started mass rapid transit and monorail projects.
Under his presidency, a national thrust in infrastructure and public welfare spending would be likely. He has also advocated reforming fuel subsidies and bureaucracy to increase transparency and reduce corruption, which would save the government a significant amount of taxpayer money that which could be diverted to infrastructure.
In the short term, there may be a boost to the country’s stock market and currency. Indonesia’s stock market is currently trading within the fair value range, and pushing through key reforms could result in an overall market rerating.
The shares of Indonesian banks and select real estate companies are already attractively valued but would do especially well under Jokowi.
Further steps to contain fiscal and current account deficits may deter the central bank from raising interest rates which could lift sentiment towards financial sector companies. Equally, an infrastructure thrust should underpin the real estate sector.
Irrespective of the election result, consensus estimates suggest that company profits will grow faster than in the past, rising in double digits over the next three years.
We would encourage investors to focus on the positive long-term prospects of Indonesia given its favourable demographics and healthy macro fundamentals.
Indonesia is fourth most populous country in the world, with a population of nearly 250 million. It is one of the fastest growing economies in the G20 and Southeast Asia’s largest economy.
Strong domestic demand and a low reliance on exports have made the economy resilient when faced with a challenging external environment, such as economic slowdown elsewhere in the world.
We expect Indonesia’s growing middle class and relatively young working population to underpin a structural consumption boom in the coming years. Such a large domestic market and strong economic growth offer opportunities to domestic and international investors.
The political guard is also changing at a key moment for the country. Headline inflation has moderated and the Indonesian Rupiah has strengthened 2.5% against the US dollar in the year to date.
Indonesia is also making progress with mending macro imbalances. Its current account deficit peaked in the second half of 2013 and has improved in the early part of 2014.
It is not a major concern if the deficit remains at the current level as it can be largely funded by foreign direct investments. However, the current tension in Iraq and a higher oil price have sparked concerns that the country’s current account deficit may deteriorate in the coming months, since it is a net importer of crude oil.