Indonesia Candidates’ Pledges Confront Budget Constraints

Indonesia’s two presidential candidates offered differing paths to generating growth and government revenue, as their pledges to improve incomes, health care and education confront the reality of budget constraints.

Joko Widodo, the Jakarta governor who’s leading polls ahead of the July 9 election, plans to improve regulations to attract investment that can help Southeast Asia’s largest economy grow more than 7 percent, he said in a debate last night against his opponent, Prabowo Subianto. Ex-army general Prabowo wants to minimize corruption within five years to recover funds.

The nation has struggled to build roads, hospitals and schools with a law that caps the budget deficit at 3 percent of gross domestic product, and a fuel subsidy program that swells with foreign-exchange and oil-price movements. The government led by President Susilo Bambang Yudhoyono said today it will cut 2014 spending among ministries by 43 trillion rupiah ($3.6 billion) as surging subsidies force it to cut back elsewhere.

“We have to recognize that there’s a fiscal constraint,” said Chua Hak Bin, a Singapore-based economist at Bank of America Corp. who predicts the budget position would be stronger under Widodo. “You’ll need another fuel-price hike, otherwise there won’t be any fiscal room to maneuver on all these grand infrastructure spending plans and so on.”

Rising oil prices spurred by conflict in Iraq have already raised risks for Indonesia’s trade and budget positions, hurting the currency. The rupiah fell 0.2 percent to 11,819 per dollar as of 1:53 p.m. in Jakarta, the biggest drop since June 10, prices from local banks show.

Both the Widodo and Prabowo camps have signaled they will cut fuel subsidies gradually. The two candidates said they would take care of Indonesians’ welfare in the televised debate last night, which focused on economic policy.

‘Mental Revolution’

Widodo called for a self-sufficient or “independent” economy, proposing “a mental revolution” in education, improved health care coverage for Indonesians, productivity boosts and economic growth with equality. He promised to aid the development of cooperatives, small- and medium-sized businesses, traditional markets, agriculture and the maritime economy.

Prabowo pledged to spread wealth out of the capital to the rural communities, by allocating at least 1 billion rupiah each year for each village. He also promised to raise wages 2.5 times from about 3 million rupiah a month to 6 million rupiah within five years, and build banks for farmers and fishermen.

Money Leaks

“Easy to say, but where’s the money?” said Wellian Wiranto, an economist in Singapore at Oversea-Chinese Banking Corp., referring to both candidates’ plans. “Prabowo kept hitting home the point about money leakage” without providing specifics on how that will be achieved, while Widodo may have a higher chance with delivering fuel-subsidy cuts to boost funding, he said.

Indonesia parliament’s budget committee approved a revised 2014 budget last week, widening the deficit target to 2.4 percent of GDP from 1.69 percent, and cutting the economic growth target to 5.5 percent from 6 percent. Fuel subsidies are estimated at 246.5 trillion rupiah, up from 210.7 trillion rupiah previously.

Current Finance Minister Chatib Basri said today the budget commission approved a 43 trillion-rupiah spending cut this year, from a targeted 100 trillion-rupiah reduction that the government proposed earlier.

Foreign Contracts

The economy can grow more than 7 percent with a conducive investment and regulatory framework, Widodo said in the debate, adding he will give incentives for export-oriented industries. Sea transport is the most important infrastructure area, to connect west and east Indonesia, and he plans to build double-track railways in Java, Sumatra and Papua, the candidate said.

Widodo also pledged to respect foreign contracts to build trust in investing in Indonesia, and evaluate contracts that expire to renew them if they are still viable, or renegotiate and repurchase assets if the contracts allow.

“Both camps still have to pander to nationalist demands to gain support,” saidSaktiandi Supaat, head of foreign-exchange research at Malayan Banking Bhd. in Singapore. “What will be key is what policies they have on the current-account deficit front and the budget deficit, given the government has revised the budget deficit higher for this fiscal year.”

Investors’ Choice

Investors have shown a tendency to prefer a Widodo presidency even as his policies aren’t much different from Prabowo’s, on optimism the Jakarta governor is more likely to be able to push through changes, Supaat said. Indonesia’s currency and shares rose after the previous debate earlier this month spurred speculation Widodo had solidified his position as the frontrunner.

Prabowo said he would invest funds from minimizing graft in health and education, targeting the recovery of 1,000 trillion rupiah a year in “leaked and lost national funds.” Industries affecting large parts of the population should be managed by the government, which must intervene to protect the weak, he said.

Both candidates spoke about populist issues without addressing how they would solve Indonesia’s real economic challenges such as inflation and the current-account and budget gaps, said Destry Damayanti, chief economist at PT Bank Mandiri in Jakarta.

“Jokowi tried to see everything from the bottom up for Indonesian people, how to empower Indonesians,” she said. “Prabowo talked more from the top down, about how to reduce corruption, how to manage the nation’s wealth. Jokowi was more practical and Prabowo more nationalist.”

To contact the reporters on this story: Yudith Ho in Jakarta at yho35@bloomberg.net; Sharon Chen in Singapore at schen462@bloomberg.net; Novrida Manurung in Jakarta at nmanurung@bloomberg.net

To contact the editors responsible for this story: Stephanie Phang at sphang@bloomberg.net Neil Chatterjee