Last updated: 09:56 / Tuesday, 29 July 2014
Report by Robeco

Indonesia: a Grown-Up Democracy

Indonesia: a Grown-Up Democracy
  • Convincing win for Jokowi
  • Most important challenge: cut fuel subsidies
  • Indonesia remains neutral in Robeco's Emerging Markets Equities portfolio for now

The official results from the Indonesian presidential elections confirmed that Joko Widodo (Jokowi) won with a convincing margin. Wim-Hein Pals, Head Emerging Markets Equities at Robeco, considers this a positive development but will wait for concrete signs of structural reforms before changing its neutral weight in Indonesia.

“Following Jokowi’s election, we expect the market’s focus of attention to shift to the coalition-building talks and the possibility of a near-term fuel price adjustment. As for the former, it is important to watch whether Golkar will switch allegiances, or if a large number of its party members join Jokowi. This would be a positive for reform momentum as it would make it easier for the coalition to pass laws in parliament”, highlights Pals in a report published by Robeco.

Cutting fuel subsidies is urgent

The second topic to watch is a possible fuel price adjustment. Fuel subsidies are the most urgent challenge. The recently revised fiscal projections and proposals to limit subsidized fuel sales confirmed that fuel subsidy costs would far exceed budget targets. The revised fiscal deficit target for this year is 2.4% of GDP, from the budgeted 1.7% of GDP. Energy subsidies, which were originally targeted below 3% of GDP, are now officially projected at 3.5% of GDP.

Maintain Indonesia’s neutral weight

According to the report, Robeco Emerging Markets Equities will remain neutral in Indonesia for now, for three main reasons:

  1. A lot of the good news, i.e. a Jokowi win, has been priced in after an enormous rally since the start of 2014. This makes the market slightly overvalued in their opinion based on price/earnings and other valuation multiples.
  2. Jokowi now has to deliver on important issues, such as infrastructure developments and cutting fuel subsidies. There is therefore an ‘execution risk’ as far as his policy is concerned.
  3. Indonesia’s macro situation is not bad (not part of the so-called fragile five family anymore), but it still has a twin deficit. Albeit manageable, a fiscal deficit and a deficit on the current account remain.

You may access Robeco’s Emerging Markets EquitiesTeam full report on Indonesia through this link