The Economic Impact of the Constitutional Court’s Ruling

Ari Kuncoro

· 6 minutes read

Since 2014, there has been a pattern of investment portfolio inflow ahead of the presidential election.

In 2013, a year before the presidential election, there was an increase in short-term capital outflows from Indonesia. This situation reflected the attitude of investors avoiding risks.

Since the beginning of 2014, when potential candidates had begun to emerge, investors had started calculating risks and included them as considerations for their portfolio allocation in potential destination countries.

During the period of January-March 2014, about three months before the presidential election, the rupiah gained 7.4 percent against the US dollar. The rupiah also rose sharply following the election of the Joko Widodo-Jusuf Kalla pair.

The surge was later called as the Jokowi effect, which had contributed to an improvement in the current account deficit, which had undermined the rupiah since the end of the commodity boom in 2012.

A similar pattern occurred in the 2019 presidential election. In 2018, the trade war between the United States and China had led to a migration of short-term funds to the US as a decline in export growth had led to a trade balance deficit of US$7.1 billion for Indonesia.

This subsequently caused the rupiah to weaken to 15,200 per US dollar in October 2018. The sharp depreciation was also due to an earlier-than-expected increase in the US benchmark interest rate.

Long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality (inverted yield curve), which suggests a recession is imminent. The foreign funds then returned to emerging market countries, including Indonesia.

The capital flows to the Indonesian stock market have increased since November 2018. This led to the strengthening of the rupiah, which reached 14,200 per US dollar in January 2019.

The foreign funds, which started to enter the Indonesian stock market since the beginning of 2019, recorded a fourfold increase in April to reach $4.5 billion. The foreign fund inflows increased to $4.8 billion in June, when the Constitutional Court issued a ruling in a dispute over the results of the 2019 presidential election.

However, the rise in the rupiah exchange rate was not significant because of the trade balance and current account deficits.

Positive expectations

As data from the Statistics Indonesia (BPS) about gross domestic product (GDP) and its components are only available at the end of the second quarter, future prospects can only be predicted from surveys that are forward looking.

One of them is a survey of consumer confidence issued by Bank Indonesia (BI). The consumer confidence index of current economic conditions issued by BI in May rose by 2.1 points to 113.5 from the figure recorded in April.

All the constituent components in the index increased, especially the employment availability index. The desire to buy durable goods, such as electronics and home furnishings, also increased with increasing confidence about future incomes. These positive expectations mainly come from the productive age group of 20-50 years.

Positive expectations are consistent with the production side of the economy. The indicators used are the Purchasing Manager Index (PMI) in the manufacturing and services sectors, which estimate the availability of inventory based on expected future economic conditions.

The Nikkei index showed that throughout the pre-2019 presidential election, the Indonesian PMI averaged above 50, which indicates that the 2019 economy would be more expansive. This index was almost unchanged from 51.2 percent in March, which was higher than the ASEAN average (50.3), Singapore (47.9), Malaysia (47.2) and Thailand (50.3).

The momentum of investment growth was disrupted in the first quarter of 2019 because of the trade wars and wait-and-see policy adopted by businessmen before the presidential election. This was shown in a decline in the Business Tendency Index from 104.71 to 102.1 in the fourth quarter of 2018.

It is expected that the Constitutional Court’s ruling, which rejected the appeal of the legal team of the presidential candidate Prabowo Subianto over the reelection of President Jokowi, will improve investors’ confidence so that investment growth, which according to the Investment Coordinating Board (BKPM), reached 5.3 percent year-on-year in the first quarter of 2019, would rebound and at least reach the 18.1 percent recorded in the first quarter of 2018 in the next quarters of this year.

Assuming there is no extraordinary external turmoil, with investment growth like this and stable consumption, the median of the government’s economic growth forecast of 5.4-5.8 percent and BI’s forecast of 5.2-5.6 percent could be achieved.

Of course, Indonesia cannot rely solely on the inflow of short-term funds, which are quite fluctuating. The potential of external shocks such as the escalation of the trade war can still undermine capital flows and trade remain high.

There was good news from the G-20 summit in Osaka, Japan, last week. US President Donald Trump and Chinese counterpart Xi Jinping struck a trade war truce and agreed to return to the negotiating table to resolve their differences of opinion.

President Trump allowed US companies to supply components to Huawei and delay the imposition of 25 percent tariffs on Chinese products worth $300 billion. This has the potential to increase the price of Indonesian export commodities, which will reduce pressure on the trade balance and balance of payment.

Although this is good news for Indonesia, anything can happen in the future. For Indonesia, efforts to diversify exports, to become part of the world supply chain and to boost investment in the import substitution industry – which produces raw materials, intermediate goods, components of service export development – must still be continued.

Realistically, imports of raw materials for industries cannot be avoided. However, participating in the international supply chain as an effort to substitute imported industrial inputs is also important.

Investment in industrial sectors producing industrial raw materials should be further increased. Regulations and licensing procedures should be further streamlined to lure more investment. If necessary, Indonesia can use a door-to-door approach like Vietnam in attracting producers supporting components of high-tech industries to the country.

Ari Kuncoro, Professor and Dean, Economics and Business School, University of Indonesia

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