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Investors Shouldn’t Bet on Indonesia Election

Joko, Joko… He’s our man. If he can’t do it, no one can! Eager voters and investors are looking to the 2014 Indonesia elections as the economy’s saving grace. With hopes for a better economy, optimism is at an all-time high.

But before piling all of your cash into the market, wait one minute. Breakingviews’ Andy Mukherjee tells Reuters’ Tara Joseph exactly why…

Joko isn’t the Savior

Tara Joseph says, “While many emerging markets are floundering, Andy, let’s take a look at Indonesia. The Jakarta stock market is up 10% so far this year. Analysts and investors are pretty excited about the upcoming election. There’s a new guy on the block. People think it’s going to herald a big change. His name is Joko Widodo, better known as Jokowi. Is it really going to change things, though?”

Andy Mukherjee says, “Well Tara, what I am arguing is that the election may not answer the investors’ prayer – and probably because investors are being a tad too optimistic. Mind you, I’m not forecasting a drop in share prices in the near term. What I am saying is that the reform expectations were equally high with President Yudhoyono 10 years ago. But those reforms never really materialized.

“Now Indonesia… [what] we must accept is a messy parliamentary democracy. Now to pin hopes on one man, even if he’s the president, can lead to eventual disappointment however well-meaning Jokowi might be. What will be important, therefore, is just what kind of control in parliament his party – Jokowi’s party, the PDIP – will have. Now that we will come to know next month.”

Take a Lesson From India

Tara Joseph says, “Politics – interesting, important. Joko – a very populist man who might change things if he’s elected. But commodities, that’s what it’s about in Indonesia when it comes to the economy. And we all know that China’s slowing down, so demand is shifting as well. It does beg the question [of] why Jakarta stocks are so high.”

Andy Mukherjee says, “Yes, Tara. Now Chinese demand is indeed important, and it is indeed slowing – Chinese demand for commodities, that is – and Indonesia, which is a major exporter of minerals, of palm oil, and coal and other commodities. Now it can’t really rely on domestic consumption, which has supported more than 40% of GDP growth in recent years, because you simply can’t do that for any length of time without investments.

“And India is a good case study because India tried to do just that, and then it floundered. Because what happens is that when you do that, you basically prop up consumption with wage growth running faster than productivity growth, and that’s inflationary. And we do know that, just like in India, inflation expectations in Indonesia, too, aren’t always well anchored. So improving the investment climate – I beg your pardon – is absolutely essential.”

Don’t Throw All Your Eggs in One Basket

Tara Joseph says, “Well let’s keep an eye on this. Elections [are] coming up in Indonesia. It’s one of the hottest emerging stock markets right now, but there are some key issues that investors should beware of.”

Before adding those few extra pennies into Indonesia’s bucket, wait and consider the possibilities. No signs show that Indonesia is “on the rocks” per se, but there’s also no proof… in fact, it’s unlikely, that one man can give the Indonesian market the boost its voters so greatly desire. But, by the looks of public sentiment, Joko, the pressure’s on!