DBS Focus Indonesias economy and markets around elections

Summary

Indonesia is scheduled to hold presidential and general elections in February 2024

Official nomination and campaign period fall in final quarter of this year

We conduct an event study to analyse how the economy fared around the past elections

This covers six key variables, including GDP growth, inflation and FDI flows over the past four polls

Growth on average moderated in the run-up, and recovered a quarter after

Investments gained ground, along with the USDIDR soon after the polls were completed

General elections are scheduled for 2024
Indonesia’s general elections are scheduled to be held on February 14, 2024, to elect the new President, Vice President, national legislative body People’s Consultative Assembly (MPR) as well as members of the local legislative bodies. The MPR consists of the Dewan Perwakilan Rakyat (DPR) i.e., House of representatives/ Lower House and Dewan Perwakilan Daerah(DPD) i.e., House of regional representatives/ Senate. The presidential election is expected to grab the most interest, as incumbent President Joko Widodo is in his second and final term in office. The next candidate is required to be officially endorsed by a political party or a coalition which adds up to either 20% of seats in the DPR or 25% of popular votes in the prior 2019 election.

In late 2022, the election body KPU announced that 17 parties were eligible to contest the upcoming legislative elections. The ruling PDI-P i.e., Indonesian Democratic Party of Struggle is the largest party in the lower house/ DPR with ~19.3% of the total votes in the 2019 elections. Amongst various candidates, three are viewed as frontrunners:

Anies Baswedan – former Governor of Jakarta backed by diverse parties, including conservative PKS, Demokrat and NasDem (latter is a part of the current ruling coalition)

Ganjar Pranowo – Governor of Central Java and recently named as the PDI-P candidate. Chair of the country’s largest and ruling PDIP party, former President Megawati, announced in a press conference in April that the party plans to endorse Ganjar as its candidate for the upcoming elections

Prabowo Subianto – Minister of Defense,endorsed by the third largest part in parliament Gerindra and National Awakening Party (PKB), both of which are part of the ruling coalition

This might be a three or two-way race by 4Q23 when the candidate list and parties backing them will be officiated. There are attempts to put together a ‘grand alliance’ to back two of the front runners, according to the local press, as the presidential and vice-presidential representatives. While little is known on the specific economic ideologies or official manifesto, political observers view Ganjar and Pranowo as candidates of continuity, whilst Anies, a change from the current policy/ economic setup. Naming of the respective Vice Presidents will also be a matter of deep interest.

Pre-election event study
We analyse Indonesia’s economic and market trends around election cycles. The analysis is based on the past four episodes – 2004, 2009, 2014 and 2019, excluding 1999 given significant volatility in economic variables in the year due to the fallout of the Asian Financial crisis. Departing from past elections which were held in June of the year, upcoming polls have been brought forward to February. In the next few sections, we discuss the impact of the poll cycles on six variables - real GDP growth, consumption, inflation, government expenditure, FDI and currency performance.

Real GDP growth and drivers
The election quarter is marked as ‘T’, with T-1 to T-3 displaying trends up to three quarters prior to ‘T’ and T+1 to T+3 reflecting three after. Using the pace of growth (or appropriate measure) during this timeline around the past elections, we calculate the average trend line.The trend for headline GDP (see chart) shows that the growth tends to moderate up to two quarters ahead of the election quarter, then stabilises, before gaining ground subsequently. This observation is backed by the general tendency for the economic actors to be cautious ahead of a poll cycle, given the likelihood of a change in the economic and regulatory agenda, and as the unofficial results are released, activity resumes again.

We, concurrently, also calculate the household consumption trend, which accounts for a little more than half of overall output. Interestingly, in the past four elections, consumption tends to rise until a quarter before. Thereafter the trend tends to stabilise with a modest downside bias.

This likely reflects the buoyancy in demand and spending around the campaigning period ahead of the polls, alongside pre-festive spending. When these catalysts pass, demand likely returns to the pre-event path. It is also noteworthy that there are other idiosyncratic factors and business cycle in those years which could also influence overall consumption and growth trends. 2009 captures the trend after the global financial crisis, whilst 2014 marks stabilisation after the 2013 taper tantrum, latter impacting markets more than the economy. Under activity variables, we also track government expenditure – mainly central government operations (total expenditure). This shows (see chart) that spending tends to slow into the quarters preceding the election quarter before picking up. This held true for nominal as well as real (inflation adjusted) fiscal spending, likely reflecting the notion that the new incoming administration might reprioritise spending allocations, which tends to slow disbursements heading into the polls.

Inflation and policy inflexion
Average of the past four cycles point to a retreat in retail inflation (see chart) in the run up and thereafter stabilise to rise in a quarter after the elections. Beyond administrative measures to shield domestic prices from supply or exogenous shocks, likely helps to keep inflation in check.

Breakdown by year, highlights that the prevailing commodity movements also likely impacted the trend, especially if a strong rise in global prices leads to adjustments in domestic fuel subsidised prices. We use the CRB Commodity index (see chart) as a proxy of the movements in global commodities across the last three decades. The trend for 2009 for example is notable – a rally in the commodity prices in global crude oil in the prior year led the government to hike the domestic subsidised fuel by 29% in 2008, leading to a surge in inflation and subsequently base effects kept inflation on a downtrend in 2009. By comparison, commodity prices were subdued in 2019, capping price pressures.

Monetary policy response during these periods was driven by a combination of inflation management, currency movements and the evolving growth trajectory. Case in point, Bank Indonesia responded to the deceleration in inflation in 2009 by loosening policy rate (the then BI rate). On the other hand, to counter extreme volatility in the currency and high sticky inflation, BI raised the policy rate by 175bp during the 2013 taper tantrum, maintained a tight stance through 2014, before undertaking a hike late in the year to counter fuel subsidy-hike driven price pressures.

FDI and currency flows
We map foreign direct investment flows (FDI) against the election cycles and observations are striking. Calculated as % of GDP to smoothen underlying data, the analysis shows that fresh FDI commitments slip into a neutral gear in the run-up to the elections and a quarter later (wait and watch as clarity on the front runners emerge). This mirrors the broader cautious around polls and the resultant implications on regulations, reforms, and openness to business.

Finally, on the currency, as the chart below suggests, USDIDR tends to pull back (rupiah strengthens) ahead of the election, settles into range and then turns up (rupiah weakness) beyond a quarter. Here too, we are mindful of the influence of idiosyncratic and exogenous factors that have a more direct impact on the currency movements, rather than just elections

Tale of two halves
Domestic growth is likely to have a stronger 1H23, before moderating in 2H on base effects,approaching elections and slower exports on easing commodity prices. Encouragingly, inflation is poised to correct sharply from August/ September, providing some relief to household purchasing power. As on date, Indonesia’s bond markets have begun to attract net foreign inflows on favourable rate/ growth differentials, besides rupiah holding up as the region’s best performer on YTD basis. In 2H, a confluence of the US Fed being on pause, stable rupiah, manageable inflation and calmer global markets, are likely to provide a conducive backdrop for Bank Indonesia to pivot to an easing cycle (Indonesia: Rate policy to pivot, fiscal off to a strong start)

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