A number of policymakers have told of the potential positive repercussions of the 2014 elections on the economy, yet in reality they could turn out to be a double-edged sword
number of policymakers have told of the potential positive repercussions of the 2014 elections on the economy, yet in reality they could turn out to be a double-edged sword.
Indeed, historic patterns show that Indonesia, the world's third-largest democracy after India and the US, normally sees an upward surge in household consumption during election years, as politicians and political parties splash money on wooing voters, ultimately driving up growth.
Bank Indonesia (BI) estimates that election-related spending will prop up annual gross domestic product (GDP) growth of between 0.1 and 0.2 percent this year ' economic support that the country badly needs, given the current slowdown.
Indonesia is targeted to post 6 percent of GDP growth in 2014; if such growth materializes, it will be the country's slowest economic expansion since 2009, when the country felt the pinch of the global financial crisis.
However, economists have expressed concerns that the negative side effects of the elections may outweigh the economic benefits, especially as they will add more uncertainty to foreign investors, who are expected to adopt a 'wait-and-see' stance before pouring money into the archipelago.
Such a situation will limit foreign investment inflows, thus complicating Indonesia's efforts to improve its balance of payments position, which has come under continual pressure; a situation that so depreciated the rupiah that it became Asia's worst-performing currency in 2013.
'The impending 2014 elections, all of which tend to breed populist fiscal policies, are the basis of our bearish view on the macroeconomic profile, especially relating to the rupiah exchange rate,' Bahana TCW Investment Management analysts Budi Hikmat and Pande Putu S. Govinda wrote in a research note.
Foreign investors may also be spooked by the fact that this year several strategic policymakers will become distracted by their own political agendas, such as Trade Minister Gita Wirjawan, State-Owned Enterprises Minister Dahlan Iskan and Coordinating Economic Minister Hatta Rajasa who are all expressing an interest in running for president.
Meanwhile, the research team at Credit Suisse noted that private consumption surged during the 2009 election but, interestingly, not during the 2004 election. The growth boost five years ago, the team argued, was in fact short-lived and was concentrated on non-food consumer spending.
'We built in a boost to consumer spending in the first quarter of 2014, but negative factors will dominate thereafter,' Credit Suisse economist Santitarn Sathirathai said. 'The negative impact from the fuel price and interest rate increases should dominate, dragging growth further.'
Bank Mandiri economist Destry Damayanti predicted that the potential upside to economic growth due to the elections might be, at maximum, 0.3 percent, but she noted that there was a possibility that the impact this year would not be as significant as in previous years.
'We need to look at the impact more carefully because in the past we used to have up to 40 political parties [competing in the election], while this year there will only be around 12 parties,' she said recently.
Foreign investors are expected to watch the presidential election with great interest, especially as Jakarta Governor Joko 'Jokowi' Widodo has suddenly become a hot topic internationally.
However, while the governor is known for his 'fix it' reputation concerning macroeconomic issues, the financial market has concerns about 'his ability to look at the big picture', according to Prakriti Sofat, an economist with Barclays Bank in Singapore.
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