Indonesia – what will next year’s elections mean for business?

  • Politics
  • 8 minute read
  • 19 November 2018

A country divided; social media campaigns and fake news; the threat of protectionism and nationalism; democracy under pressure – sounds familiar? The forthcoming Indonesian elections seem to share some of the negative aspects of recent elections in democracies around the world. But here, when the crowd cries for politicians to be locked up it is more likely to happen, as can be seen by the imprisonment for two years on blasphemy charges of Jakarta’s Christian governor Basuki Tjahaja Purnama (colloquially known as Ahok) in May last year, following a series of protests that drew hundreds of thousands on to the streets of the capital Jakarta. At first sight many of the dividing lines in Indonesian politics seem to be between a more liberal and progressive vision of the country and those who wish to impose an increasingly conservative version of Islam. Yet this is to overlook the complexities of politics on the ground, in which Islam is often used as a weapon to gain political advantage. What may ultimately be more relevant to foreign investors in Indonesia is the degree to which protectionism and politicisation of Islam prevents them from competing on a level playing-field, the continuing problems with the legal system, and the longstanding challenge of dealing with entrenched corruption.

Jokowi’s response to a changing climate

Ahok – the Jakarta governor who was convicted of blasphemy – is a close ally of the president Joko Widodo (colloquially referred to as Jokowi) and had been his deputy when Jokowi was himself governor of Jakarta (2012-14). Jokowi’s close relationship with Ahok, his moderate opinions and – most importantly – the success of his political opponents in capitalising on the growing dissatisfaction of the low-income, largely Muslim, sections of the population, have left Jokowi vulnerable to criticism that he has not paid enough attention to the needs of the Muslim majority and that his political programme has been insufficiently Islamic. Jokowi was therefore compelled to counter those allegations and to boost his Islamic credentials by appointing a prominent Islamic cleric as his running-mate, Ma’ruf Amin (who, ironically, played a key role in the movement that brought down Ahok). This seems tactically astute, although it may be strategically risky as it shows Jokowi allowing his opponents to define the terms of the debate.

Some critics are worried that in the likely event that Jokowi and his vice-presidential candidate Ma’ruf win the forthcoming elections in April his second-term administration would be more conservative and less tolerant. Ma’ruf , however, is an older man (he is now seventy-five) and has little experience of areas such as his economic policy, foreign affairs, and defense. His own agenda seems to revolve around a “middle way” of Islam that is defined as being conservative but not fundamentalist. Of most relevance to foreign investors, he will likely focus on Islamic-related issues such as increasing regulation of halal certification – for example, he recently spoke at an event in which he stated that halal products were not limited to food and beverage products, but that Indonesia should implement the halal concept in areas such as fashion, style, culinary, education, and finance. For foreign companies, this may mean a tightening regulatory climate for certain products and services, but it is unlikely to be overly onerous. Nonetheless, the food and beverage, pharmaceutical and cosmetic sectors will be most vulnerable to such regulatory and operational risks.

Jokowi’s main opponent, Prabowo Subianto, a former special forces general and the son-in-law of the former dictator Suharto, is running against him for a second time, having been defeated in the 2014 election. Although Prabowo has been adept at using the Islamic vote against his opponents, his own family was in fact protestant Christian. More to the point, the role of religion in the run-up to the next election is gradually becoming less important. The economy will likely dominate the election, with Prabowo expected to focus on undermining Jokowi’s infrastructure development and accusing him of “economic mismanagement” (as he has been in recent weeks), particularly because Jokowi has not achieved the growth of 7% per year he promised in 2014; the current GDP growth continues to stay around 5%.

Economic nationalism and the anti-Chinese vote

Ahok was imprisoned on blasphemy charges but it is relevant that he was not just a Christian but also ethnically Chinese, making him politically doubly vulnerable given anti-Chinese sentiment. A key part of Prabowo’s programme is focused around economic nationalism, which remains popular in Indonesia. Mirroring the criticism and subsequent cancellation of various Chinese “belt and road’ projects in Malaysia after Mahathir Mohamad won the country’s May 2018 General Election, Prabowo has sought to emulate Mahathir and has suggested that Indonesia could become:

…a nation of errand boys, slaves, a weak nation and a nation that can be bought and a nation that can be bribed.

An attack on foreign investment could reveal another vulnerability of Jokowi, one linked to his greatest success as president – infrastructure. Jakarta’s new mass rapid transit (MRT) rail system is due to start operating in March next year, just one month ahead of the presidential and legislative elections. Anyone visiting Jakarta will be fully aware of the necessity of this long-delayed transportation service, given the gridlocked traffic in the world’s most congested city. Jokowi’s infrastructure plan does not come without controversies, however; several key - particularly Chinese-led - projects have relied heavily on significant Chinese labour and imported materials, opening him up to attacks based on anti-Chinese sentiment. In addition, he has been widely criticised for failing to curb the numbers of Chinese workers (legal and illegal) within the country. Although the actual numbers are likely to be widely exaggerated for political mileage, the impression rather than reality is what counts in Indonesian politics (and elsewhere in the world as the last few years have shown).

Jokowi himself has not been free from playing the nationalist and populist card in his treatment of foreign investments to boost his electoral prospects, whether in pushing state-owned oil company Pertamina to take greater ownership in domestic oil and gas blocks from foreign companies operating for decades in Indonesia or by taking a tough stance on Freeport McMoRan’s closely-watched divestment of its 51% majority stake in Papua province’s Grasberg mine (the world’s largest operating gold mine). Nonetheless, a campaign focused on economic nationalism is likely to lead to the two main candidates competing to raise the pressure on foreign investors in Indonesia. It could also inflame tensions within the country, where ethnically Chinese business families - who are perceived of as doing business and profiting at the expense of the largely poor Muslim majority - have often been targeted for abuse and even violence. It could even spill over into other South-East Asian countries given that prejudice against Chinese communities across the region remains common.

Corruption remains a problem

It will surprise no one that corruption remains pervasive and entrenched in Indonesia. Recently, a leading investigator at the Anti-Corruption Commission (KPK), Novel Baswedan, who was partially blinded in an acid attack two years ago, lamented that “nothing has happened to reduce corruption” during the period of Jokowi’s presidency. Jokowi himself is regarded as clean and has made considerable efforts to reduce red-tape and corruption for businesses. However, August saw the first member of his cabinet indicted for corruption. The Social Affairs Minister, Idrus Marham, was linked to corruption relating to a Sumatran power station PLTU Riau-1 (the environment is another area on which Jokowi faces criticism, albeit it does not seem to be a particularly important electoral issue). Jokowi’s opponents have been unable to politicise Idrus’s arrest and use it to attack Jokowi (especially as Jokowi himself has not been directly implicated in any such scandal). Nonetheless, corruption remains a key challenge for all foreign investors looking to operate in Indonesia.

Judicial System

The sentence imposed upon Ahok, the former governor of Jakarta, re-ignited long-running concerns about the Indonesian judicial system. Corrupt judges and the lack of an independent judiciary, especially when political and national interests are involved (such as Ahok’s blasphemy conviction) has led to a widespread distrust of the system among foreign investors and companies (and a boom in arbitration cases regarding Indonesian matters in neighbouring Singapore). This public distrust of the local judiciary could also become an issue in the unlikely event that the presidential election is once again closely contested between Jokowi and Prabowo (as was the case in 2014) and the outcome were to be determined by the Constitutional Court, which has been unable to restore its reputation since its chief Akil Mochtar was in 2014 convicted in a high-profile corruption scandal. During Jokowi’s first term in office, judicial reform has not really been on the agenda and it is unlikely to be a key part of his second term (should the polls be correct in predicting his re-election).

At the time of writing, Jokowi’s re-election still remains the most likely outcome, but much can change between now and the April elections. In addition, even if Jokowi wins a second term it is possible that the election campaign may itself be bitterly divisive and also produce a series of discriminatory policy pronouncements against foreign investors and businesses. Nonetheless, many of these issues will be relatively familiar to those who have already operated in the country and predictions that the election will be dominated by religion and a growing intolerance of minorities are likely to prove unfounded.