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BT OUTLOOK 2018

Cautious politics in Indonesia as government tackles challenges

President Joko Widodo likely to 'play it safe' as elections loom amid growing conservatism and policy missteps

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Some of Mr Joko's reforms include the world's biggest tax amnesty, which uncovered assets stashed overseas worth the equivalent of nearly S$1 trillion, as well as 16 economic reform packages aimed at cutting red tape and wooing investments.

Jakarta

INDONESIAN President Joko Widodo may have two years left in his term, but as 2017 draws to a close, so too, in effect, does his first term in office.

Regional elections in the country's most populous provinces, including its most populous provinces of West and East Java, may discourage any further blockbuster reforms lest he risk upsetting voters.

Add to that the country's lurch to the religious right and the moderate Mr Joko will almost certainly play it safe.

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Following a series of high-profile reforms, including the elimination of fuel subsidies, a tax amnesty, as well as reversals, such as the resumption of mineral ore exports, his focus now ought to be on consolidation, said Keith Loveard, an analyst with Jakarta-based risk analyst firm Concord Consulting.

"You won't see any more big-bang reforms," he said. "What they need is implementation of what they've done already."

Some of what Mr Joko has done already include the world's biggest tax amnesty, which uncovered assets stashed overseas worth the equivalent of nearly half a trillion Singapore dollars, as well as 16 economic reform packages aimed at cutting red tape and wooing investments that could stimulate growth. But most of the packages have largely failed to stimulate economic growth - which hovers at 5 per cent - or cushion the impact of slumping foreign direct investment, especially in the resources.

Policy reversals

This is due in part to a shrinking demand for energy and minerals. But Indonesia's regulatory flip-flops have made a tough situation worse.

In January this year, the government relaxed its 2014 ban on some mineral exports, a move that was aimed at supporting the development of a local smelting industry.

Instead, the government said it would allow shipments of copper concentrate, nickel ore and bauxite, which are used in the production of aluminium.

The trouble is, companies such as Brazil's Vale had already pledged billions to build smelters. Shares in Vale slumped more than 15 per cent in the months that followed the decision, while nickel cratered 30 per cent on worries the market would be flooded with the metal.

Indonesia's resources sector was the standout this year for chopping and changing regulations.

The Ministry of Energy and Mineral Resources issued a flurry of rules, including one in July requiring mining companies to secure the ministry's permission before changing members of their board.

That rule was changed two weeks later - just one of more than 40 regulatory changes that month.

Still, the government may be on the cusp of a resources win next year. Finance Minister Sri Mulyani Indrawati has said she's optimistic the government will strike a deal by February 2018 to secure a 51 per cent stake in the Indonesian business of US mining giant Freeport-McMoRan in exchange for extending the company's permit to mine the concession past the 2021 deadline.

Even so, investors are still shying away from the sector more than they used to.

Foreign direct investment in Indonesia's mines has plateaued at US$1 billion during the three months to October, in line with the previous quarter.

In 2016, the sector earned US$2.7 billion, down a third from the year earlier.

"They were getting commitments on the smelters. People have a right to be appalled at this behaviour," Mr Loveard said. "They have undercut confidence."

For Mr Joko, winning a second term at elections not due until mid-2019 will hinge on him navigating the country's growing conservatism.

In April this year, his protege Basuki Tjahaja Purnama was defeated in a landslide for re-election as governor of Jakarta in a contest that centred largely on race and religion. Mr Basuki, a Christian of ethnic Chinese descent, was jailed a month later after being convicted of having insulted the Koran while campaigning.

There is some optimism that Mr Joko will be able to contain the hardliners. In July, he banned the group Hizbut Tahir, which calls for the establishment of an Islamic caliphate in Indonesia.

This month, he replaced troublesome general Gatot Nurmantyo, who is widely expected to seek support from nationalists and Islamic conservatives in a bid to win high office.

In January, Mr Nurmantyo unilaterally severed military ties with Australia because of a perceived slight to Indonesia's founding principles, the Pancasila.

Recent polls have Mr Joko riding high, with surveys suggesting more than two-thirds of respondents approving of his performance.

Even so, he can expect attacks from the religious right as the election nears.

While Prabowo Subianto, Mr Joko's former opponent, is expected to embark on his second attempt at the top job during the coming months, a long-shot candidacy in the guise of Anies Baswedan is also likely, says Ade Armando, a professor of communications at University of Indonesia.

Following his inauguration as Jakarta governor in October, Mr Anies has sought to maintain the coalition of conservatives that helped elect him.

In November, he revoked the licence of an infamous massage parlour, the Alexis Hotel, a bugbear among the pious.

He appeared this month at a rally to mark the one-year anniversary of the record-breaking demonstration that helped unseat Mr Basuki.

At his inauguration, Mr Anies encouraged the city's "Pribumi" - shorthand for the Muslim majority - to become "masters of their own house".

"Watch out for Anies," Mr Ade said. "He is going to do everything he can to show his Islamic credentials."

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