2014 Elections In Indonesia And India: The Macro View

BMI View: Two of Asia's emerging market heavyweights - Indonesia and India - are gearing up for general elections in 2014. While it is too early to pick the eventual winners, the respective outcomes will have a huge bearing on the future trajectory of economic growth in both countries. In this article, we flesh out our initial thoughts on possible election scenarios, and what they might mean for both economies over the long term.

Two of Asia's emerging market heavyweights - Indonesia and India - are gearing up for general elections in 2014. In Indonesia, legislative elections will be held in April, with presidential polls following shortly thereafter in July. India has yet to announce specific dates, but with the current 15th Lok Sabha (parliament) completing its constitutional term on May 31, it appears likely that the country will head to the ballot box in Q114 or early Q214. While it is too early to pick the eventual winners, the respective outcomes will have a huge bearing on the future trajectory of economic growth in both countries. In this article, we flesh out our initial thoughts on possible election scenarios, and what they might mean for India and Indonesia's macroeconomic fortunes.

Indonesia: Moving Past The Commodities Boom

Greater Freedom, Faster Growth
Indonesia - Real GDP Growth & Index Of Economic Freedom

BMI View: Two of Asia's emerging market heavyweights - Indonesia and India - are gearing up for general elections in 2014. While it is too early to pick the eventual winners, the respective outcomes will have a huge bearing on the future trajectory of economic growth in both countries. In this article, we flesh out our initial thoughts on possible election scenarios, and what they might mean for both economies over the long term.

Two of Asia's emerging market heavyweights - Indonesia and India - are gearing up for general elections in 2014. In Indonesia, legislative elections will be held in April, with presidential polls following shortly thereafter in July. India has yet to announce specific dates, but with the current 15th Lok Sabha (parliament) completing its constitutional term on May 31, it appears likely that the country will head to the ballot box in Q114 or early Q214. While it is too early to pick the eventual winners, the respective outcomes will have a huge bearing on the future trajectory of economic growth in both countries. In this article, we flesh out our initial thoughts on possible election scenarios, and what they might mean for India and Indonesia's macroeconomic fortunes.

Indonesia: Moving Past The Commodities Boom

Indonesia has entered election season in its worst economic shape for a number of years. The country's business cycle is very much past its peak, with real GDP growth falling to a 12-quarter low of 5.8% year-on-year in Q213. Moreover, with the monetary authorities maintaining a tight policy stance to rein in fierce inflationary pressures and a current account deficit worth 4.4% of GDP, further domestic demand weakness is likely. A precarious macroeconomic backdrop typically bodes ill for policy discipline ahead of elections, and Indonesia has seen its fair share of populism in the run-up to the vote (such as the recent drive towards resource nationalism).

Greater Freedom, Faster Growth
Indonesia - Real GDP Growth & Index Of Economic Freedom

In the past, we have argued that Indonesia's multi-year growth boom has been more than just a pure commodities play. Even though prices for key commodities, such as coal and palm oil, peaked in 2011, Indonesia has managed to maintain healthy economic expansion and attract strong foreign direct investment (FDI) flows, and we attribute this to tangible improvements in the country's business environment ( see chart) since President Susilo Bambang Yudhoyono first took office in 2004. However, with commodity prices likely to remain under duress as China looks to rebalance its top-heavy economy, Indonesia can ill afford to see a reversal in pro-market policies, which could force investors to think twice about putting their capital into the country. To be sure, our long-term outlook remains sanguine, with real GDP growth projected to average 6.2% per annum over the coming decade. Much of this, however, will be driven by strong growth in fixed capital. Should improvements in the investment climate stall or reverse - after all, the country is still ranked at a lowly 120 th in the World Bank's Doing Business 2014 report - Indonesia could fail to realise its strong growth potential.

All About Investment
Indonesia - Real GDP & Fixed Investment, % chg

It is by no means a given that Indonesia's structural business environment improvements will be unwound, but the lack of visibility is a clear risk. The country's political landscape is dominated by personalities rather than politics, and the strength of institutions such as the judiciary remains fairly fragile. Yudhoyono is constitutionally barred from running from a third term and, in his absence, there are a number of candidates whose political ideologies remain somewhat opaque. The table below outlines three of the frontrunners for Indonesia's top job, and what is clear in each case is the lack of clarity on economic policy. For example, Jakarta Governor Joko Widodo (commonly known as 'Jokowi') has enjoyed success in reducing red tape and easing business procedures, but has also overseen an aggressive 44% increase in the capital's minimum wage. Another leading candidate, ex-general Prabowo Subianto, has talked up the need to clamp down on corruption, but his standing is also scarred by alleged human rights violations committed during the latter years of the Suharto regime (1966-98). Until uncertainty over the policy direction of a new leadership is put to bed, which is unlikely to happen until a new government is up and running, we believe that investment activity will struggle to recapture its previous gusto.

Indonesia - Key Presidential Candidates
Candidate Background Economic Policy Leanings
Prabowo Subianto An ex-military officer during the Suharto regime, Prabowo currently heads up the Gerindra Party, a smaller member of the opposition coalition with socialist tendencies. He was previously a key stakeholder in the Golkar party. Prabowo's election platform is based on tackling corruption and, encouragingly, he has talked about the need to roll back fuel subsidies further. He has also stated the need to reduce the income gap between Jakarta and other regions.
Megawati Sukarnoputri Megawati is the daughter of Sukarno, the country's first president. She also held the presidency between 2001-04 and remains a key player in the Democratic Party-Struggle (PDI-P) despite unsuccessful presidential bids in 2004 and 2009. Megawati's presidency was marked by a lack of clear ideological direction, with slow progress on economic reforms. That said, she helped cement the country's democratisation process.
Joko 'Jokowi' Widodo Elected as governor of Jakarta in 2012, Jokowi's recent successes have catapulted him into the spotlight, making him a leading candidate for the PDI-P's ticket in the presidential elections. Jokowi's governorship style has been 'hands-on' and he has engaged with the grassroots electorate. He has also helped to reduce red tape, clamp down on corruption, and ease business procedures. However, he has also overseen aggressive increments in minimum wages.
Source: BMI, Local Media

India: Can It Get Any Worse?

India's ruling coalition, the United Progressive Alliance (UPA), has been a huge disappointment to investors since winning re-election in 2009. The enduring legacy of its second stint at the helm will be one of expensive corruption scandals, coalition infighting, about-turns in economic policy, and massive project execution delays - all of which have hammered the country's investment story. Indeed, as the accompanying chart shows, the UPA has been one of the least productive in India's history, and it is perhaps unsurprising that companies such as Walmart, POSCO, and BHP Billiton have decided to walk away from major investment projects in recent months.

A Huge Disappointment
India - Parliament & Infrastructure Project Statistics

The UPA's troubles are manifold, but at the heart of the problem lies an inability to forge a clear policy agenda that is agreed by all sides. For a start, the dominant Indian National Congress (INC) party is split between socialist and pro-market factions. Meanwhile, smaller regional allies are much more concerned about shoring up local support bases than pursuing national policy goals. This has led to a weakened central government that has lacked the political capital to get things done.

Any incoming administration will face the same challenges of coalition politics, in our view. In order for either the INC or the centre-right main opposition Bharatiya Janata Party (BJP) to form a fully-functioning government, it is essential for either party to win upward of 200 seats in order to keep coalition partners in check. While the BJP, led by its charismatic prime ministerial candidate Narendra Modi, looks well positioned to increase its presence in the Lok Sabha, it too will fail to come anywhere close to winning a simple majority in the 543-member house. As such, a BJP-led coalition government could well face many of the same issues that have plagued the current administration. Another four years of hamstrung governance and, by extension, reform inertia would clearly not be looked upon kindly by investors, and could see India's economic growth trajectory remain well below par.

The Gujarat 'Miracle'
India - Gujarat Vs All-India Economic Growth, %

Clearly, there is a lot riding on next year's election results, and for this reason Indian corporates and foreign investors are likely to wait until after the ballot box before embarking on a major investment drive. Still, we believe that sentiment towards India's political landscape has already reached a low ebb, meaning that any positive news on the political front is likely to help re-ignite economic activity eventually. While Modi is a divisive figure (not least due to his Hindu nationalist leanings), his economic track record in Gujarat has been impressive. As the accompanying charts shows, the state has consistently outperformed the national real GDP benchmark since Modi took the reins in 2002. Anecdotally, too, we have continued to see new projects spring up in Gujarat, such as in the autos space ( see 'Gujarat's Infrastructure Wins It For Suzuki', December 3 2012), even as the country's broader investment story has suffered. Much of this can be explained by the Gujarat state government's market-friendly platform. Assuming he is victorious, which is not guaranteed at this stage, Modi may well manage to transfer some of this success onto the national stage, which could help to unlock India's undoubted growth potential. On balance, despite its recent woes, we still expect India to clock average annual expansion of 6.3% over our 10-year forecast period, which would make it one of the fastest-growing economies globally.

India - Key Prime Ministerial Candidates
Candidate Background Economic Policy Leanings
Rahul Gandhi The scion of the Nehru-Gandhi dynasty, India's most prominent political family, Rahul Gandhi is the overarching favourite to lead the Indian National Congress at the ballot box. Gandhi has limited experience in office, but is currently serving as vice-president of the party. Gandhi's economic beliefs remain shrouded in uncertainty. He has backed his mother, INC Chairman Sonia Gandhi, in socialist policies such as the Food Security Bill. He has also endorsed Prime Minister Manmohan Singh's reform initiatives. As such, he has yet to come into his own.
Narendra Modi Current chief minister of Gujarat, Modi has been selected to front the opposition Bharatiya Janata Party's leadership bid. Modi is also a member of the Hindu nationalist group Rashtriya Swayamsevak Sangh (RSS). Modi has won many plaudits for Gujarat's strong economic performance, and is generally seen as pro-market by Corporate India. However, his leadership style is seen as somewhat autocratic, which may not translate well on the national stage.
Source: BMI, Local Media

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Sector: Country Risk
Geography: Asia, Indonesia, India
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