Indonesia president-elect Jokowi seen as boon to investments

Pearl Bantillo

23-Jul-2014

(recasts paragraph 24 to clarify attribution) 

Focus story by Pearl Bantillo

SINGAPORE (ICIS)–Indonesia has declared Joko “Jokowi” Widodo as the winner of its recent presidential elections, clearing political uncertainties that should encourage more foreign investments into the country, analysts said on Wednesday.

“Joko Widodo, or Jokowi, is viewed as a more progressive and pragmatic choice for President than his opponent, Prawbowo Subianto,” energy industry consultant Wood Mackenzie said in a statement, adding that “Jokowi’s victory will generate short-term positivity for foreign companies looking to invest in Indonesia’s energy and mining sectors”.

Indonesia’s Elections Commission announced late on Tuesday that Jokowi, who is the governor of Jakarta, had secured 53.15% of the 130m votes cast on 9 July, winning the elections by a marginal six-percentage point edge over rival Subianto, according to media reports.

“With his track records as the mayor of Solo and then governor of Jakarta, Jokowi is perceived to be the candidate who will make a stronger push for economic reforms,” Singapore-based DBS Bank Research said in a note.

“His victory in the polls will sustain some euphoria in both the public and the markets,” it said.

Dispelling concerns about rising nationalism in the Indonesian economy, DBS Bank Research noted that the country requires an estimated $35bn-40bn over the next five years for infrastructure.

“And this is already the lower estimate based on the current master plan of the [Indonesian] Ministry of National Development. These funding needs cannot be fulfilled by domestic investors alone, and thus, the next government is likely to be pragmatic,” the Singapore-based research firm said.

“The economy is still open for business, including for foreign investors,” it added.

Indonesia, the biggest economy in southeast Asia, grew at a 5.21% in the first quarter – the lowest recorded in more than four years, according to media reports.

For the whole of 2014, the economy is projected to grow by 5.2%, according to the World Bank.

“With the elections behind us, rising optimism for reforms may continue to support recovery in investment growth, keeping some support to the GDP growth outlook into 2015,” DBS Bank Research said.

But the new government’s ability to implement reforms remains uncertain, according to Wood Mackenzie, citing a lack of majority in the Senate to speed up legislative reforms needed to boost the Indonesian economy.

In the upstream oil and gas sector, major investments projects have been stalled because of regulatory uncertainty, Wood Mackenzie said.

These include Chevron’s Indonesia Deepwater development, Inpex’s Abadi FLNG and BP’s Tangguh expansion.

Consequently, Indonesia’s crude output has declined to around 800,000 bbl/day currently from 1m bbl/day in 2005, with the government saddled with fuel subsidy that is expected to reach $21bn this year.

“At a time of growing domestic energy demand, declining indigenous production, and after several years of regulatory instability, the government’s ability to implement Jokowi’s proposed reforms will be key,” said WoodMackenzie senior upstream analyst Andrew Harwood.

Jokowi is looking at reducing Indonesia’s reliance on oil imports by developing new gas infrastructure and accelerating the switch to gas.

He further aims to boost the country’s oil and gas output by providing enhanced fiscal terms for mature fields and exploration, and removing red-tape, which would also apply to the mining sector, Wood Mackenzie said.

“A revision of the 2001 Oil and Gas Law and formalisation of the upstream regulator’s role is a longer term objective that would enhance the investment environment by removing regulatory uncertainty,” it said.

If sanctioned by the government, the three stalled projects could generate more than $30bn of new investment in Indonesia’s oil and gas sector, Wood Mackenzie said.

“While we would expect Pertamina to play a greater role in Indonesia’s upstream sector under Jokowi, the new president also recognises the benefits of working with international investors to secure technological know-how as well as investment,” the industry consultant said.

Pertamina is Indonesia’s state-owned oil and gas company.

In the fuel market, the government is expected to push through further price reforms, which will impact near-term demand.

“Subsidies are a huge burden to the government because around 60% of the total oil demand is subsidised. During the period of 2014-2020, we estimate the total fuel subsidy bill to be around $120bn, assuming current domestic prices in Indonesia,” said Sushant Gupta, head of Asia Pacific downstream research at Wood Mackenzie.

The subsidies account for around 3% of the country’s GDP “and is therefore unsustainable”, Gupta said.

A sharp reduction in subsidies could cause demand to drop by around 60,000-70,000 bbl/day in gasoline and 45,000-50,000 bbl/day in diesel.

“The current market size of unsubsidised retail fuels (gasoline and diesel) is very small; however, there is a huge upside potential if the government fully deregulates the market,” Wood Mackenzie said.

“This would provide a good market opportunity to foreign players operating in the unsubsidised retail fuels market or new players looking to invest in refining and retail sectors in Indonesia,” it said.

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