Indonesia Presidential Election Update - Joko Widodo claims victory July 9, 2014 Summary Indonesia, the country with South-East Asia’s largest economy and the third most populous democracy in the world, went to the polls on Wednesday, 9 July 2014 to elect a new President. With incumbent President Susilo Bambang Yudhoyono constitutionally barred from seeking a third term in office, unofficial results indicate that Indonesia’s 186 million registered voters have chosen Joko Widodo (nicknamed “Jokowi”) over Prabowo Subianto to be their new premier. After a large early lead in the polls for Jokowi, Prabowo made up ground significantly but it seems that Jokowi has managed to hang on for victory. Nevertheless, Prabowo has not conceded defeat. In this update, we take a look at who Jokowi has in his corner should his position be confirmed as Indonesia’s 7th President, how his policies appear to be shaping up and, most importantly, how those policies may be expected to affect foreign investors during a five year term of office. Who is Joko Widodo? During his campaign, Jokowi held the position of Governor of Jakarta (although this post will now be relinquished and handed to his deputy Basuki "Ahok" Tjahaja Purnama) and was the presidential candidate for the Indonesian Democratic Party – Struggle (PDI-P). Page 1 of 6 His tenure as Governor of Jakarta has been punctuated by an unorthodox and practical approach which has seen his popularity surge such that he has consistently topped most credible polls – despite his relative political inexperience and even before it was confirmed that he was to stand as a presidential candidate. Jokowi is seen as an incorruptible reformer and, in contrast to his opponent, a man who deals with problems through consultation and consensus, although he sought to portray a tougher image in recent weeks as the election day approached. Policy overview Mirroring the outlook of his opponent, Jokowi used increasingly nationalist rhetoric in his campaigning, with a particular focus on resource nationalism. During his Presidency, Jokowi has stated that economic independence and self-reliance in a number of areas, including food, will be central areas of focus for his regime, and that education and human development bringing about a revolution of the national character and culture will be the cornerstones of his plans for economic growth. Broadly, the other aims of Jokowi’s term of office seem to be to regain public trust in institutions, develop Indonesia from the periphery, support law enforcement, raise the quality of life for citizens and increase productivity and competitiveness. Jokowi has also spoken publicly of his plans to modernise the armed forces, support Palestine's membership of the UN, prepare for the 2015 ASEAN economic community, promote Indonesian products abroad and protect the maritime nation's natural resources from activities such as illegal fishing and logging. Recently, in the third of five candidate debates with Prabowo, Jokowi noted that despite his nationalist outlook, established contracts with foreign partners should be respected. Despite the strong nationalist message in both campaigns, advisors to both candidates have said – both publicly and in private - that such rhetoric was primarily designed to increase support amongst Indonesia’s 186 million voters and that ultimately policies would be developed with recognition that foreign countries have an important role to play in the Indonesian economy and national development. Page 2 of 6 Jokowi’s vision, employing a bottom-up approach, involves 'the creation of an Indonesia that is sovereign, independent and has an identity based on gotong royong', a philosophy of working together towards a common goal. Government structure in Indonesia Indonesia employs democratic, multiparty presidential system in a democratic system. Presidential systems feature a separation between legislative and executive branches, which means separate elections for the two. This will be the last election cycle in Indonesia in which the model whereby two separate elections are held for parliament and President is used. In order to qualify to run in the Presidential race, both Jokowi and Prabowo were required to formulate coalitions of parties that supported their bid, because neither PDI-P nor Prabowo’s Gerindra won enough votes (25% of total required) or seats (20% of total required) in April's legislative election to do so on their own. Jokowi, originally a middle class furniture entrepreneur, was endorsed in his run for the Presidency by The People's Conscience Party (Hanura), the National Democratic Party (NasDem), the National Awakening Party (PKB) and the Indonesian Justice and Unity Party (PKPI). The President of Indonesia is both head of state and head of government and of the multi- party system. Executive power is exercised by the government which comprises the president, the vice president and the cabinet. The cabinet comprises a handful of Coordinating Ministers responsible for areas such as Political, Law and Security Affairs, the Economy and People’s Welfare and numerous other ministers with differing portfolios. Regional government is also part of the executive. Legislative power is vested in both the government and the People's Consultative Assembly which is comprised of the People's Representative Council and the Regional Representative Council. The judiciary is independent of the executive and the legislature. The leader, party and key power players Page 3 of 6 Upon election, the President will appoint a cabinet, the members of which do not have to be elected members of the legislature. This will be Jokowi’s first task as President. Jokowi’s running mate was former Golkar Chairman Jusuf Kalla, who already has experience of Vice Presidential duties having previously served in the post under President Susilo Bambang Yudhoyono between 2004 and 2009. He was also Trade Minister (1999-2000) during the Abdurahman Wahid administration and Coordinating Minister of People’s Welfare (2001-2004) during the Presidency of Megawati Sukarnoputri. Whether there is much of a Golkar presence in the new government remains to be seen. Prabowo’s remarkable recovery in the polls was attributable at least in part to the coalition he secured with Golkar, the country’s second-biggest party in the legislative elections, whose Chairman, Aburizal Bakrie, gave up his own presidential bid. This coalition was somewhat unexpected given that Jusuf Kalla was Jokowi’s running mate. Jokowi’s success may see Jusuf Kalla seek to oust Aburizal as Golkar Chairman: if this happens, there may be greater opportunities for Golkar politicians in Jokowi’s cabinet. What is likely is that there will be prominent positions for senior members of the PDI-P, in particular its leader, former President Megawati Sukarnoputri, who is seen as the “king- maker” working behind the scenes of Jokowi’s ascent to power and who herself is the daughter of Indonesia’s first leader, President Sukarno. Policy areas – what you need to know and how this affects you On 9 June 2014 Deutsche Bank released a survey of 70 respondents who were contacted between May and June of 2014 and asked about what they intended to do with their assets in Indonesia once the election result was known. The survey results showed that at least 74% of investors indicated that they would buy Indonesian assets in the event that Jokowi prevailed, while only 6% said they would divest their investments. Energy Page 4 of 6 Jokowi has said that he will issue a government regulation in lieu of law to replace the Upstream Oil and Gas Regulatory Special Task Force with a new energy management system. He has also indicated his intention to revise the Oil and Gas Law to prioritise the development of national capacity and provide legal certainty for businesses. Export ban There is a disappointing outlook for companies in the mining sector. In the run up to the election, all the major political parties confirmed their on-going support for the existing export ban that has led miners to halt US$6 billion in annual mineral exports. The ban on mineral exports and tax concentrate shipments is aimed at compelling mining companies to build smelters in Indonesia. In fact, the PDI-P has gone as far as to state that it intends to further boost mining company payments to the government: immediately prior to the election, Jusuf Kalla announced that Jokowi’s administration would increase exports of processed minerals as opposed to raw ores and introduce more incentives for local miners. Fuel subsidies Jokowi has pledged to introduce a subsidy cut through fuel-to-gas conversion in the transportation sector alongside explicit encouragement to the automobile industry to develop alternative energy vehicles. In parallel, he intends to slowly increase the fuel price over the next 4 to 5 years to manage the subsidies which act as a huge drain on government finances. Infrastructure Jokowi has pledged to construct 2000km of new roads, 10 seaports and 10 airports. He has also said that he will improve irrigation systems for an estimated 3 million hectares of existing agricultural land, build a series of new dams and create 1 million hectares of new land outside of Bali and Java for farming. Jokowi has advocated strong investment in making health and education services accessible and has committed to at least maintaining the requirement under Indonesian law that 20% of the state budget be allocated to education. He has also said that he will renovate and revitalise 5000 traditional markets and that fuel subsidy savings will be reallocated to infrastructure developments. Page 5 of 6 Regional investment Under his leadership, Jokowi envisages public participation in governance, capacity-building for local government authorities and focussing on civic education in schools nationwide. He intends to provide more villages with new housing and construct 10 new industrial estates complete with housing for their workers.