Extra Risk in the Political Year

In addition to supply chain disruptions and the global recession threat, increasing political heat ahead of the 2024 election could pose an additional risk for business players.

TOTOK WIJAYANTO

Prospective investors consult with the one-stop integrated service officer at the Investment Coordinating Board (BKPM) Building, Jakarta, Tuesday (26/1/2021).

JAKARTA, KOMPAS — The threat of a global recession and increasing inflation at the producer level are not the only obstacles to business. The increasing political heat ahead of the 2024 elections may cause uncertainty that has the potential to slow down investment.

Although the 2024 general election, which will be held on 14 Feb. 2024, is still about 19 months away, the political heat has begun to increase. The maneuvers of a number of political elites make the political year seem to arrive faster. This situation impacts the business climate amid the threat of a global recession.

During the Kompas Collaboration Forum (KCF) which was held on Friday (15/7/2022), a number of business leaders expressed their worries about the latest development in the political situation in the country.

The director of corporate affairs at PT Toyota Motor Manufacturing Indonesia, Bob Azam, said in addition to the threat of a global recession and inflation at the producer level (cost-push inflation), which had begun to push up operating costs, the increasing political heat during the political year would be the biggest risk that had to be faced by the business world.

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According to Bob, populist policies, which were usually more dominant ahead of the elections, had the potential to affect business, as they could discourage new investments.

"I am sure that investments that are long-term and large in nature will be delayed until the election is over. This will be a challenge for the business world,” said Bob.

In the automotive sector, he said, the government's decision not to extend Vehicle Luxury Tax Exemption was a form of populist policy. According to him, such a tax exemption is unpopular because it only benefits certain groups of people. In fact, this tax-exemption policy has partly led to an increase in tax revenues from the automotive sector in the state budget.

At present, the realization of investment is still on track to meet the government's target. In the first quarter of 2022, for example, investment realization amounted to Rp 282.4 trillion (US$18.85 billion), a 28.5 percent increase year-on-year or a 16.9 percent increase quarter-to-quarter.

KOMPAS/RIZA FATHONI

Activities in the exhibition hall after the opening of the Indonesia International Motor Show (IIMS) Hybrid 2022 at JI Expo Kemayoran, Jakarta, Thursday (31/3/2022). IIMS 2022 is followed by a row of four-wheel, two-wheel and aftermarket automotive manufacturers..

According to the Investment Coordinating Board (BKPM) at the Investment Ministry, the increase in investment in the first quarter has been the greatest of any increase in the last 10 years. The investment realization during the period amounted to 23.5 percent of the government’s 2022 investment target of Rp 1,200 trillion.

In 2021, investment realization amounted to Rp 901.02 trillion, which exceeded the target of Rp 864 trillion set in the National Medium-Term Development Plan (RPJMN) and the target of Rp 900 trillion set by President Joko “Jokowi” Widodo’s administration.

Investment Minister and chairman of BKPM, Bahlil Lahadalia, was optimistic the global recession and inflation risks would not affect new investment in Indonesia. According to him, the investment target is on track because the business climate is still relatively conducive. In fact, Indonesia has received a windfall profit from increasing energy and commodity prices.

Until 2022, according to our data, investment is still on track. It is still a big question what will happen next year.

However, Bahlil was unable to predict the investment realization in 2023. He said that the ongoing investment projects were running as scheduled. Although a number of countries that invested in Indonesia were expected to face a recession this year, it would not affect their investment in the country because if the investment was halted, it would bring more harm to them, he added.

"Until 2022, according to our data, investment is still on track. It is still a big question what will happen next year. We are still analyzing the investment trend in 2023. It will be dynamic, but we must remain optimistic,” Bahlil said.

KOMPAS/WISNU WIDIANTORO

Minister of Investment/Head of the Investment Coordinating Board Bahlil Lahadalia (center), Editor-in-Chief of Kompas Daily Sutta Dharmasaputra (left) and Kompas Research and Development Researcher Ignatius Kristanto (right) while speaking in the Afternoon Tea discussion #10 Kompas Collaboration Forum (KCF) with the theme "The Impact of War Russia-Ukraine on Investment in Indonesia" which was held at the Kompas Gramedia Building, Jakarta, Friday (15/7/2022). The event was attended by a number of CEOs from various companies that are members of KCF.

Wait and see

When contacted separately, economist at the Center of Reform on Economics (CORE) Indonesia, Yusuf Rendy Manilet, said that in the midst of the uncertainty in the political year, business actors would generally choose to wait and see who would be elected in the general election before making investment decisions.

"They will decide their investment plans after 2024. Perhaps, [investment] will be held back a little. If they wanted, for example, to expand, they would wait until there was certainty about who will be elected," said Yusuf.

However, not all investments will be affected by the political uncertainties. Investment in sectors that are less vulnerable to the impact of policy and regulatory changes will continue to expand and help boost economic growth.

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In the midst of an uncertain political situation, Yusuf said, the business climate should be further maintained so that it would remain conducive. One way to do so is by establishing regulatory and policy certainty, as changes in policies and regulations would discourage investors, he said.

Based on experiences in previous years, Yusuf said that populist policies would be more dominant ahead of the general election, such as via the increase in government social assistance. Such populist spending would affect the state-budget capacity.

“For example, in 2023 [the government] will spend a large amount on subsidies. It looks populist, but we have to look at the condition of state revenues. There should be a balance between the expenditure and revenues," said Yusuf.

According to him, one of the most important matters is ensuring that the distribution of social assistance reaches the targeted recipients. “So far, the assistance has often not reached the eligible recipients and this has been a problem for years. However, it seems that this year, the government is more serious in managing social assistance. We have to wait to see how the government will implement it,” said Yusuf. (AGE/DIT)

This article was translated by Hendarsyah Tarmizi.