Driving commercial and political engagement between Asia, the Middle East and Europe
Driving commercial and political engagement between Asia, the Middle East and Europe
Driving commercial and political engagement between Asia, the Middle East and Europe
By Sandra Sahelangi, Indonesia advisor, with contributions from Charlie Humphreys, Director of Corporate Affairs at Asia House.
Key takeaways
Smooth political transition
After securing a resounding victory in the 2024 Indonesian presidential election, Prabowo Subianto and Gibran Rakabuming Raka, the newly elected president and vice-president, will be inaugurated on 20 October – exactly 10 years since the last transfer of power.
While a smooth transition is expected, there are a number of key developments which will shape the policies of the new government. These include the upcoming budget and the appointment of key cabinet positions.
The big tent coalition that Prabowo led to secure his victory is morphing into an even bigger coalition, with political parties that supported his opponents in the presidential elections expected to join Prabowo’s administration come October. Prabowo’s move is widely seen to be an attempt to secure two objectives: a comfortable majority in parliament, and a slew of trusted candidates running in key regions in the November 2024 regional elections (electing Governors, Mayors, and Regency Heads). It is not yet clear if objective one will be achieved – this will depend on the appointment of cabinet ministers. The second objective is already evident in the gubernatorial candidates of heavily populated and influential areas. These areas include Jakarta, Central Java and North Sumatra, among others.
Prabowo’s cabinet appointments are important to watch – especially for businesses – as virtually all regulatory frameworks for business operations will be decided at ministerial level. A unique feature that was absent in previous transitions of power is the eight-month duration between the results of the election and the actual inauguration. This has fuelled uncertainty, with heavily regulated business sectors having to adopt a longer ‘wait and see’ stance. By statute, filling positions in the cabinet is a president’s prerogative. In practice, however, a delicate balancing act is necessary to placate differing political forces, to ensure much-needed stability of the government and adequate support from the Parliament.
In the background, outgoing President Joko Widodo, popularly known as Jokowi, is not about to fade out quietly. After successfully supporting Prabowo’s campaign to win (and securing a place for his son Gibran as the next vice-president), Jokowi was also seen as a key figure in a sudden leadership change of the Golkar party, now led by one of Jokowi’s close aides. This puts him in a very influential position post-presidency, as the Golkar party is the second largest party in the parliament, even larger than Prabowo’s Gerindra party. Further, this puts significant pressure on Prabowo to include at least some of Jokowi’s circles in the cabinet.
To manage the growing and varying political interests in Prabowo’s big tent coalition, the Gerindra party is proposing a bill to amend the law on ministries, that if passed would enable Prabowo to increase the number of ministries currently capped at 34. The Gerindra Party aims to have this bill passed in September. If approved, this would grant Prabowo more flexibility in assembling his cabinet and accommodating different interest groups.
As Prabowo prepares for his inauguration, the dynamics between him and Jokowi are expected to evolve, marking the beginning of Prabowo’s independent governance. Recent developments have suggested that Prabowo is on a smooth trajectory to consolidate power. Two back-to-back cabinet reshuffles by Jokowi within a one-month period is part of Prabowo’s move to place trusted aides in key positions leading up to the inauguration. This includes Prabowo’s nephew Thomas Djiwandono as Vice Minister of Finance and former personal aide Sudaryono as Vice Minister of Agriculture – both seen to be natural stepping stones for top jobs in both ministries. The appointments also suggest that Prabowo’s signature campaign promise, the free meals program, is one he intends to keep, signified by having two trusted lieutenants in these two important portfolios – one to manage food production and the supply chain, and the other one to fund it. Other key appointments include Minister of Law and Human Rights and Vice Minister of Communications, both filled up by long-time Prabowo aides.
Businesses should watch this evolution of Prabowo’s dynamics with Jokowi and how that translates to changing priorities but continuity and stability are still likely to be the overarching themes.
A more aggressive economic posture
Prabowo’s incoming administration is expected to be more liberal and aggressive in its spending. This is not only due to his free meals program for school children (his signature campaign promise), but an overarching Keynesian theme that more government spending would result in stronger growth. This is in contrast to Jokowi’s conservative fiscal posture. Hashim Djojohadikusumo, Prabowo’s brother and key advisor, has stated that the incoming government may allow a 50 per cent debt-to-GDP ratio, a considerable increase from the current 38.59 per cent. To ease concerns over this potential aggressive debt posture, Hashim also stated that this would not happen unless revenues are increased, naming “taxes, excise taxes, royalties from mining, and import duties” as revenue drivers. Indonesia’s current revenue-to-GDP ratio remains one of the lowest in Southeast Asia at around 14 per cent.
What may be interesting to watch is how the free meals program could reduce budget allocations for other big-ticket items. One such item is the new capital city project, a signature program in Jokowi’s second term. The current government, along with Prabowo’s economic team, has announced a IDR 71 trillion (US$4.4 billion) allocation for the free meals program and IDR 13.2 trillion (US$820 million) for the new capital project. Consistently, Prabowo himself has previously stated that he will allocate up to US$1 billion annually for the new capital project, or close to 4 per cent of the 2025 draft budget allocated for infrastructure development. This represents a downshift for the new capital – Jokowi spent US$4.6billion between 2022-2024 to build key infrastructures of the new city.
Reactions to the increased spending plans have been mixed. Morgan Stanley recently downgraded Indonesian stocks to underweight on 10 June, citing two main reasons: substantial fiscal burden from campaign promises (such as the free meals program) and the continued depreciation of the Rupiah against the US Dollar. HSBC followed suit, downgrading Indonesian equities from overweight to neutral on 26 June, stating that “earnings are being hit by high interest rates and weak FX, while there’s uncertainty around government policies amid potential changes to the cabinet in the near term”.
Fitch Ratings, on the other hand, affirmed Indonesia’s Long-Term Foreign Currency Issuer Default Rating at ‘BBB’ with a stable outlook on 15 March. Fitch stated projected solid growth at 4.9 per cent in 2024 and 5.3 per cent in 2025; projected inflation within the target band at 2.7 per cent in 2024 and 3.0 per cent in 2025; and broad policy continuity as some of the key drivers for ratings. Moody’s was in the same mood – on 16 April it affirmed Indonesia’s Baa2 issuer rating with a stable outlook. It cited continued economic resiliency, prudent fiscal and monetary policies as drivers for the ratings. Both Fitch and Moody’s acknowledged medium-term uncertainties caused by potential fiscal policy changes to accommodate signature programs, but stated that implementation of such programs would likely be gradual and targeted.
S&P Global Ratings also affirmed Indonesia’s BBB investment grade with a stable outlook on 30 July, but did flag fiscal uncertainties that may arise from programs envisioned by incoming Prabowo’ s government. Once details of these programs are announced, it is likely that concerns over uncertainties would subside. On balance, the outlook is generally positive as evident by global investors flocking to Indonesian equity and bonds. Investor cash inflow for August 2024 is the largest since January 2023, may even increase further as the Federal Reserve is expected to begin monetary easing.
Businesses should look out for the 2025 state budget, currently being discussed by both the current government and the Parliament. Once sealed, this will be the first state budget that will govern Prabowo’s administration. Analysing how much is allocated to what ministries will provide a clearer outlook on what Prabowo’s priorities are, including which big ticket items are up and which are down on the priorities list, and how these expenditures will be funded. In addition, businesses should also be on the lookout for potential further downgrades by rating agencies, triggered either by fiscal burdens or by monetary policies in conjunction with the Rupiah’s continuing depreciation. So far in 2024, the Rupiah has been sliding down 6.26 per cent against the US Dollar.
Another variable to watch is the government’s plan to raise Value Added Tax (VAT) from the current 11 per cent to 12 per cent. The government’s authority to implement this increase is already passed by the parliament, but it is up to the government when or whether to do so. When asked, Finance Minister Sri Mulyani Indrawati stated that “it is for the president-elect to implement the 2025 budget, both for revenues and expenditures side”. The incoming government may need to re-evaluate this VAT increase, as the latest statistics showed that middle class shrank from 57 million to 47 million people. With the middle class as the primary drivers of domestic consumption, an increase in VAT may negatively impact their spending power, and that may hamper growth targets.
Two other important figures to analyse are foreign direct investment (FDI) and the economic growth rate. FDI for Q2 of 2024 rose 16.6 per cent year-on-year to IDR 217 trillion (US$13.5billion), as stated by the Investment Ministry. This represents a slight increase from 15.5 per cent for Q1. An export ban of nickel ore enacted in 2020 created a large demand for investments in metal refining projects. The Investment Ministry also stated that more FDI projects in metal refining are still in the pipeline. Economic growth in Q2 was 5.05 per cent, slightly above the forecasts of 22 economists polled by Reuters. Key drivers for this growth include rising in both household consumption and exports.
Looking at the above indicators, Indonesia’s economic trends look stable. Based on statements of Prabowo and of his team on government revenues being key to the implementation of their signature programs, Prabowo will likely be as investor and business friendly as possible and will be keen to attract FDI. This can also be seen by Prabowo’s choices of international visits so far after winning the election.
A foreign policy president
As President-elect, Prabowo Subianto has conducted several notable international visits. During his campaign, he emphasised a “one thousand friends too few and one enemy too many” approach to both national politics and international relations. As soon as he was elected, he wasted no time to apply that approach; nationally by inviting former rivals into his camp, and internationally by conducting visits as both Minister of Defence and President-elect. His approach to foreign policy seems to chime with the time-honoured Indonesian ‘non-aligned, neutral and active’ foreign policy. In practice, this non-alignment means multi-alignment; reserving the right to simultaneously engage with multiple global power blocs. To date, Prabowo has made official visits to more than 15 countries as President-elect.
His first trip was to China, where he met with President Xi Jinping. This visit underscored the importance of Indonesia-China relations, particularly in economic cooperation. Prabowo emphasised his commitment to continuing the policies of his predecessor and highlighted areas for further collaboration, such as trade, defence, and poverty alleviation.
China is a crucial source of foreign investment for Indonesia. China invested US$30.2 billion in Indonesia from 2019 to Q1 2024, with over 21,000 joint projects in that period. Official government data states that these numbers make China consistently in the top five countries of foreign direct investment in the last five years. Indonesia’s overall China policy in a Prabowo presidency will likely continue to be similar to Jokowi’s, continuing with heavy emphasis on economic ties and large trade and investment volume, including Chinese-led large-scale infrastructure projects. On the South China Sea issue, Prabowo is expected to continue a passive role. With a defence budget of 0.62 per cent of GDP, Indonesia is still likely to rely on diplomatic and non-military efforts if tensions escalate.
Another notable visit was his recent visit to Russia, where he met with President Vladimir Putin and focused on trade talks. Both Prabowo and the current Jokowi government are attempting to achieve two objectives: a push for a free trade agreement between Indonesia and a Eurasian bloc led by Russia, with Armenia, Belarus, Kazakhstan and Kyrgyzstan as members, and a counterweight to ties between Indonesia and the European Union. Jokowi as president has been successful at maintaining a non-aligned position and friendly relations with multiple blocs, and Prabowo is keen to be seen as continuing this non-aligned position, albeit with more personal presence at the world stage.
Before his trip to Russia, Prabowo visited France to meet with President Emmanuel Macron, where he discussed stronger military cooperation. As Defence Minister in the current government, Prabowo ordered 42 French Rafale fighter jets to be delivered in 2026. He also visited Turkey to meet with President Erdoğan, also to strengthen defence cooperation. As Defence Minister, Prabowo purchased 12 surveillance and reconnaissance drones from Turkish Aerospace just last year. Another angle of the Turkey visit was Prabowo’s desire for Indonesia (as Muslim-majority nation) to be more influential in the Islamic world. In addition to these visits, Prabowo has visited various countries including Japan, Malaysia, the UAE, Qatar, Singapore, Jordan, Saudi Arabia, and Serbia.
Prabowo has also stated that he will pay special attention to Africa. In his Newsweek opinion article “The Road Ahead for Indonesia—One of the Fastest Growing Economies in Asia”, he stated that Africa is “a continent close to [his] heart and today, just like Indonesia, a land of opportunity.” He then continued stating that Indonesia and Africa “can support each other, sharing our experiences and by building synergies and partnerships, work to transform our countries.” Prabowo claims to have met the Presidents of Rwanda and Mozambique, stating that these African countries look up to Indonesia on how to develop their own. This, again, can been as Prabowo attempting to increase Indonesia’s international clout by building on Jokowi’s Africa approach. Of note are two Indonesia-Africa Forum (IAF) summits that Jokowi initiated, the first one in 2018 and the second just recently in September 2024. Trade is a large part of the summit, with deals announced on gas, healthcare, agriculture, and minerals, and Prabowo was seen centre stage at the summit, formally introduced as President-elect by Jokowi.
In September, Prabowo continued by visiting neighbouring countries: Australia, Brunei, Thailand, Laos, Cambodia, and Vietnam, all of which (bar Australia) are ASEAN countries. These visits underscore Indonesia’s importance in the region as its most populous country, and Prabowo is keen to be able to both maintain and expand Indonesia’s regional influence.
Thus far, Prabowo’s visits can be interpreted as continuing Indonesia’s non-aligned positioning. In concrete terms, it is a delicate balance between maintaining friendly relations with the West, and building a more developed tactical relationships with countries such as China and Russia. For instance, even with all the friendly overtures to China and Russia, Indonesia still does not intend to join the BRICS economic bloc. Indonesia is however in the process of joining the Organisation for Economic Cooperation and Development (OECD), a group comprising the United States, the United Kingdom, Japan, and other Western countries and allies as members. On specific issues, Prabowo is expected to maintain Indonesia’s “neutral and active” doctrine, maintaining friends but at the same time reserving the option to lodge targeted criticism.
Prabowo’s trips to visit various Heads of States and his statements in international media as president-elect strongly suggests his desire for Indonesia to be more influential on the global stage, while maintaining its non-aligned stance. To achieve that, Prabowo will likely continue to visit other countries to personally engage other leaders.
Summary
Indonesia’s transition to a Prabowo presidency – and his consolidation of power – is underway. Prabowo will benefit from this smooth transition, and will likely continue most of Jokowi’s signature programs, albeit with different pace and prioritisation schemes. The government budget draft looks rational given current conditions, but the incoming administration needs to be mindful of the shrinking middle class when formulating economic policy. If Prabowo can play his cards well, he will benefit from Jokowi’s sound economic foundation and will be in a position to enhance both Indonesia’s growth and international influence.
Asia House is working with governments across Asia, the Middle East and the West, as well as multilateral organisations and the private sector, to drive commercial and political engagement around key issues in global trade. For more information on our research and programmes, please contact Katie Reid, Stakeholder Engagement Associate via katie.reid@asiahouse.co.uk.
