The country
Indonesia is the most populous country in Southeast Asia and its largest economy, and also represents the world’s third-largest democracy. The composition of the economy is roughly 42% industry, 42% services and 12% agriculture.1 The country has a long-established global position in the production and processing of raw commodities such as coal and palm oil.
The elections are only the fourth since independence in 1945
This year’s Indonesian elections are the largest in the world in terms of the number of citizens voting on a single day. On February 14, approximately 205 million voters will select the next president and the representatives in the legislature (in Indonesia, serving members of the armed forces and police are not allowed to vote). If no candidate achieves the 50% plus one vote threshold to win outright, there will be a second round between the top two candidates on June 26. All 671 legislative seats will also be up for grabs in Indonesia’s bicameral system. Thousands of provincial and local level offices will also be contested.
According to the latest LSI Denny JA poll on January 30, Prabowo Subianto (commonly known as Prabowo) leads at 50.7% with the other two candidates behind at around 20% each, with Anies Baswedan trailing slightly.2 Prabowo ran and lost against Joko Widodo (known as Jokowi) in 2014 and 2019.
What does it mean for investors?
Investors appreciate the country’s disciplined macroeconomic policies. The steady increase in exports of processed metals means external deficits are unlikely to spiral out of control. Meanwhile, its improved infrastructure has helped limit logistics costs, thus helping control inflation. As is normal in election campaigns, there is much talk of higher social welfare payments, which could potentially pressure the fiscal deficit, but the candidates also talk of tax reform to increase government revenues. Some are preoccupied by the government’s ban on exports of nickel and bauxite, which are effectively incentivizing onshore processing of the minerals, to capture more of the added value in production and promote local supply chains.
It seems likely that regardless of the election outcome, Indonesia will be able to continue to balance relationships with China and the United States, while being well placed to build a key position in the new architecture of global supply chains, based around its critical mineral resources. Setting aside the different gross domestic product (GDP) trend growth targets of the candidates, which range from 5.5% to 8% per annum, the key variation looks to be the degree of divergence from the Jokowi-era policies, depending on the winning candidate.
One important issue that construction companies and private-sector infrastructure investors are watching is whether the current administration’s project to move the capital from Jakarta to a new city called Nusantara on Borneo Island will actually happen. Jakarta is home to 11 million people, of which a third do not have access to piped water. So, they rely on illegal wells drilled into the subterranean aquifer. The result is unsustainable water level depletion from illegal wells and regular subsidence. Jakarta is sinking fast—in some parts of the city, this depletion has resulted in a 16 foot (4.9 metres) subsidence in the last 25 years.
The candidates
The polls indicate that Defense Minister and ex-General Prabowo Subianto is in the lead with a 20-point gap, but may not reach the 50% threshold, triggering a second round against either Anies Baswedan (ex-governor of Jakarta) or Ganjar Pranowo (ex-governor of Central Java). It is difficult to predict the winner, as over 60% of eligible voters are under 40 years of age—meaning that inflation control, jobs and corruption are key issues.
Of these, Prabowo appears to be the one most likely to stay close to (incumbent) President Jokowi’s policies. He backs the move of the capital away from Jakarta, the drive to energy independence via greater use of biodiesel and bio gasoline, and developing Indonesia’s upstream minerals processing sector.
Ganjar emphasizes the need to crush corruption, modernize agriculture and to lower interest rates for micro-, small- and medium-sized companies, to boost job creation. He has committed to the completion of the new capital in Nusantara.
Anies has campaigned promising to focus on job creation, with a preference for labor-intensive industries like agriculture, manufacturing and livestock farming, over capital-intensive nickel smelting, for example. He is also against the creation of the new capital in Nusantara, which he dismisses as too costly.
All three candidates are committed to the modernization and upgrading of Indonesia’s armed forces, including investing in cyber security; Anies is the only one publicly against joining the “Quad” (the loose alignment of the United States, India, Australia and New Zealand), as he believes in non-alignment. Prabowo is the most vocal on investing in a blue-water navy (one capable of projecting across the world), to better defend against potential incursions.
Most observers expect Prabowo Subianto, chairman of the Great Indonesia Movement Party (Gerindra) and the incumbent defense minister, to eventually win. He is supported by his running mate, Gibran Rakabuming Raka, the governor of Surakarta and Jokowi’s eldest son.
Prabowo’s likely victory would enable Jokowi to remain highly influential in the new government. It would also position Jokowi’s son Gibran to be Indonesia’s next president in 2029 or 2034, meaning long-term, dynastic ambitions for Jokowi’s family.
Potential market impact
This analysis examines the impact of presidential elections on the domestic equity market, focusing on the 90 trading days before and after election dates, beginning with the inaugural direct presidential election in 2004. Notably, 2004 featured a two-round election process in July and September due to the absence of a candidate achieving the requisite majority in the first round.3 The findings reveal that, on average, the equity market returned +10% return within 44 trading days (roughly two months) following the election date across the four presidential elections observed since 2004, with the exception of the 2014 elections. In the periods leading up to elections, Indonesia’s stock market predominantly exhibited positive returns, except for 2019, when the market showed flat to negative returns.4
Exhibit 1: Indonesia Equity Performance: 90 Days Around Election Dates
Furthermore, the analysis indicates a broader variation in market returns before the election compared to after, suggesting a greater uncertainty among investors prior to the election outcomes. This pattern is visually represented through the dispersion lines in the accompanying charts, highlighting the contrast in market behavior surrounding presidential elections.
Exhibit 2: Indonesia Equity Performance—90 Days Around Each Election Date
Notes: Below are the election dates. Election results dates were used in the charts.
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1. Source: Statista, World Bank – World Development Indicators. As of 2022.
2. There is no assurance that any estimate, forecast or projection will be realized.
3. This study uses the September 2004 date as the reference point for that year’s election analysis.
4. Sources: Analysis by Franklin Templeton Institute. Franklin Templeton Institute, IDX, Macrobond. Equity returns based on Jakarta Stock Exchange Composite Index. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
