Briefing 14 May 2019 What next after the Indonesian elections? - GraphCMS

Briefing 14 May 2019

What next after the Indonesian elections?

On 17 April Indonesia concluded its unprecedented concurrent presidential and legislative
elections. Apart from a few minor issues the elections went relatively smoothly. Unlike in Thailand,
Indonesia's Election Commission (KPU) has been globally commended for its impressive handling
of the election, despite the huge logistical challenges. There was a remarkable voter turnout of
about 80% voter turnout (of the 193 million eligible voters) and there were barely any reported
incidents of intimidation, manipulation or violence across the country's 800,000 polling booths.
The KPU is due to announce the official results on 22 May but the general picture is already clear.
Below we look at both the immediate and the long-term implications of the results.

Presidential elections – immediate outcome and likely
challenges
In line with the quick count results, there is no doubt that incumbent President Joko “Jokowi”
Widodo (alongside his vice-presidential runner Ma’ruf Amin, a prominent cleric) is expected to
easily secure his second term presidential victory against his sole rival, former general Prabowo
Subianto (running with scion Sandiaga Uno), with 54-56% of the vote. At the time of writing on 10
May, the Jokowi-Ma'ruf pairing continues to lead comfortably at around 56.2% compared with
Prabowo-Sandi at around 43.7%, with around 75% of the votes recapitulated by the KPU.

Regardless of Prabowo’s persistent refusal to concede defeat, we assess that Jokowi-Ma’ruf will
ultimately secure the 2019 presidential elections and any attempt by Prabowo to challenge the
outcome at the Constitutional Court will likely be futile – akin to his similar legal challenge to
Jokowi's win in the 2014 presidential election. Since the quick count results released on 17 April,
Prabowo’s team has adamantly rejected the results and announced victory four times within two
days, claiming that the internal vote counting indicated a Prabowo victory with 62% of the vote;
Prabowo’s team remains, however, unable to produce credible data to back this up. Instead, they
have launched concerted efforts to undermine the KPU by claiming that it failed to address
“structured, systematic and massive” fraud and have threatened to mobilise their supporters to
hold “people power” protests – calls started by former National Mandate Party (PAN) and now
key opposition leader Amien Aries. The main concern is that, if Prabowo’s campaign team were to
be successful in its propaganda efforts to discredit the KPU and therefore undermine the latter’s
election result, this would have an impact on domestic political stability and security.

Political and security implications
Nonetheless, we believe that political and security risks have been overplayed: such risks will be
brief, contained (mainly to Jakarta, particularly KPU and election watchdog Bawaslu offices) and
have limited impact on wider businesses. Previous widespread concerns over a repeat of big
"212" rallies in 2016-17 by religious hardliners against Basuki Cahaya Purnama "Ahok" (former
Jakarta governor accused of blaspheming Islam) and intense identity politics did not occur

throughout the 2019 election period, though Jokowi's choice of Ma'ruf and the now-fragmented
212 movement reduced this risk. In particular, many political observers have not factored in the
Islamic Ramadan season (5 May - 4 June) that has just started. The month-long fasting and the
subsequent Idul Fitri festive period (a season to display forgiveness and compassion and closely
adhered to by Indonesian Muslims) will reduce the risk of serious unrest.

In addition, the intensifying government efforts to clamp down on “treason-related” Prabowo
protests – overseen by Co-ordinating Minister for Political, Legal and Security Affairs Wiranto and
backed by influential security institutions such as the police and army (TNI) – will render any wider
and destabilising protests highly unlikely, most evident in the dispersing of the first “people
power” rally in Jakarta on 9 May held by pro-Prabowo PAN leader Eddi Sudjana and former army
general Kivlan Zen. The transition in the coming months into Jokowi's second term is likely to be
smooth.

Economic analysis and policy trajectory
Once the KPU confirms the result, Jokowi will waste no time in speeding up the reforms he
pledged since 2014, which, thus far, have been slower than he had hoped for. As well as
continuing his focus on infrastructure development, Jokowi will also embark on reforms of
education, labour, healthcare and trade (focusing on boosting exports to resolve the prolonged
current account deficit). Jokowi and his economic team are eager to improve GDP growth that
has been stagnating at 5% (in contrast to Jokowi's 2014 pledge of 7% GDP growth), though this is
also attributable to external factors amid the U.S.-China trade war and other global uncertainties.

To achieve greater economic growth, Jokowi will have to intensify efforts to attract foreign
investment (and reduce over-reliance on state-owned enterprises, including in developing
infrastructure) and create a strong economic team in his cabinet. Although there were some
improvements in metrics tracking the ease of doing business under Jokowi’s first term, investors
can now expect him to take a stronger stance in cutting red-tape hampering investments,
streamlining bureaucracy and improving human resources and employment skills – all these
reforms will be targeted at improving the pro-FDI climate.

Jokowi’s balancing act: parliamentary support vs
cabinet appointment
To predict Jokowi’s decisions about the upcoming and much-anticipated cabinet, it is important
to analyse the parliamentary composition from the latest legislative elections. About six to seven
small political parties are unlikely to pass the 4% parliamentary threshold and will not be featured
in the new House of Representatives (DPR). Nonetheless, the DPR composition is likely to largely
remain the same and dominated by three main parties: pro-Jokowi PDI-P (19-21%), followed by a
close fight between Prabowo’s Gerindra (11-14%) and New Order-era Golkar (11-13%), Surya
Paloh’s Nasdem party (9-10%), the Democrat Party (PD) of former president Susilo Bambang

Yudhoyono (8%), and the Nadhlatul Ulama-linked PKB party (6-7%).

Prabowo’s coalition is mainly made up by Gerindra and the Islamic PKS party. Meanwhile,
Jokowi’s PDI-P-led coalition, backed by most of the nine parties that passed the threshold for
parliamentary representation, will form a comfortably safe coalition in the 575-seat DPR. This
essentially means that Jokowi’s reform policy is likely to have sufficient support in the parliament,
including the controversial labor law revision to ease hiring and firing that would benefit
businesses, but likely can only be done in exchange for political appointees from some of these
parties. All the parties are waiting for the KPU's poll result confirmation on 22 May, after which
horse-trading will officially start. It will be no surprise if Jokowi awards seats to Golkar, PD,
Nasdem and PKB to secure support for his reforms.

With regards to timing, there is a good likelihood of two cabinet reshuffles in 2019: a minor
reshuffle after Idul Fitri in June-July and more significant cabinet changes after Jokowi’s
inauguration in October. The former will likely affect the religious, trade, industry and sports and
youth ministerial posts, whose respective incumbents (Lukman Hakim Saifuddin, Enggartiasto
Lukita, Airlangga Hartato and Imam Nahrawi) have been implicated in separate corruption
scandals in recent weeks.

With several incumbents (such as cultural minister Puan Maharani and law minister Yasonna Laoly)
likely to be elected into the DPR, the October reshuffle will be bigger and with greater business
and economic implications. It will demonstrate Jokowi’s growing clout and test his willingness to
choose technocrats over political appointees and to streamline his cabinet positions. We believe
he will ultimately balance gathering parliamentary support and awarding parties in forming his
cabinet; the most likely outcome will see him placing technocrats in his economic team to
improve investor sentiment, while appeasing political patrons with more domestic-related
ministerial posts (such as home affairs, legal, security, social, religious, human development and
tourism). To this end, investors will be closely watching who he will appoint in his cabinet,
particularly the economic portfolio which has featured credible faces such as Sri Mulyani, Darmin
Nasution and Tom Lembong.

Summary
Jokowi will return with more power and can afford to be more independent in policy and cabinet
decisions. Realistically, however, he will need to pick his battles and balance political interests in a
way that will enable him to further his reform agenda in the next five years. Corruption will not be
eliminated by 2024, but the country's economic and business outlook should benefit from his
planned reforms in Jokowi’s second term. Indonesia is set to become the world's fourth-biggest
economy by 2030, but the success of foreign businesses in Indonesia will continue to be affected
by their ability to navigate and mitigate local political, regulatory, reputational, corruption and
security risks.

About Argo Associates
We seek to provide our clients with the information and intelligence that will allow them to navigate acquisitions,
investments, disputes, or frauds in a clear-sighted and rational way, minimizing risk and maximizing opportunities.

Information gathered may clarify the profile and background of key business people and managers; it could illuminate
the operations of a company or demonstrate a history of fraud or mismanagement; or it could help our clients to
assess the political situation in a given jurisdiction and how it may affect their investments or business operations.

Headquartered in Hong Kong, Argo Associates assists clients across Asia and – through international partners –
globally.

Intelligence Gathering
“Intelligence” is central to making sense of the world and to decision-making. Argo Associates has developed a
network of well-placed human sources across Asia and – through our partners outside Asia – globally. This network
provides insights beyond what is available publicly – into leadership, operations, strategy, corruption, red flags,
political connections and so on - and is supplemented by extensive research and analysis of publicly available sources
– corporate filings, litigation filings, regulatory communications, media articles, social media postings and so on. In a
world in which information is increasingly commoditized, high-level intelligence and analysis provides the insights that
give our clients an edge over their competitors.

Fraud, Corruption and Disputes
Our intelligence-gathering techniques and in-depth research and analysis have also helped our clients uncover frauds
within their operations or in those of a portfolio company or recent acquisition. Our professionals have provided
numerous reports for arbitration or legal proceedings to recover the proceeds of fraud. We have also assisted clients
in tracing assets globally when bringing a high-value claim against a company or individual. In high-profile disputes we
have assisted top law firms in gathering information, evidence and intelligence in support of their clients’ cases.

Political Risk
Our political risk work has developed naturally out of our intelligence and investigative capabilities. We see political
risk as an important part of the evaluation of many investments, mergers and acquisitions, as well as a key element of
commercial disputes in many markets. We have helped our clients look at political risk in a new way, not just in terms
of the broad outline of potential political developments in various countries, but with a focus on the impact on their
businesses. For example, will growing frictions between two countries lead to tariffs that could impact the specific
sector in which a portfolio company operates? Or, how will rising protectionism in a country alter the possibility of a
fair result in an ongoing commercial dispute? Frequently, politics is local as much as national and we understand the
importance of drilling beneath the widely-circulated opinions to a real understanding of what is happening.

Jason Wright, Managing Director of Argo
                                   Associates
                                   Prior to founding Argo, Jason was a Managing Director in Hong Kong for
                                   Kroll. Before moving to Asia in 2011 he worked for Kroll in Italy for five
                                   years and then briefly in London.

In addition to assisting clients on numerous transactions, investigations and disputes in Asia and Europe, -
particularly private equity funds, banks, hedge funds and special situations investors - Jason has also
specialized in the analysis of political risk, whether that has involved examining the role of local politicians,
regulators and other stakeholders, or broader geopolitical concerns.

Although he has managed projects across the whole Asia-Pacific region he has been particularly focused on
China, Korea, and Southeast Asia, especially Indonesia, Vietnam, Malaysia and Thailand.

Jason is a scholar of St. Catherine’s College, Oxford, having been awarded a Master of Arts (Oxon) in English
Language and Literature, as well as a Master in State Management and Humanitarian Studies from La
Sapienza University in Rome, Italy.

Lina Gautama, Director
Lina Gautama is a South-East Asia expert, focusing particularly on Indonesia, Malaysia and Thailand. An
Indonesian national, she has advised clients on political, commercial and integrity risks across the region.

As well as handling complex investigations in sectors such as mining, oil and gas, and the automotive
industry, Lina has also delivered anti-bribery and anti-corruption assessments for foreign investors and
overseen pre-transaction investigative due diligence projects across the region.

Prior to joining Argo Associates, Lina worked with Control Risks, Keppel and ConocoPhillips. She holds a
bachelor’s degree in Business from Singapore Management University. Lina is fluent in Bahasa Indonesia,
Bahasa Melayu and Mandarin, and speaks some French, Spanish and Thai.

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