An Economic Shadow Over a Political Year

An Economic Shadow Over a Political Year

By Shoeb K. Zainuddin on 9:07 am January 13, 2014.
It was early Sunday morning, the sky gray after a night of heavy rain. The air was damp but that did not affect the mood of the thousands of Jakartans who were out on Jalan Sudirman, cycling, walking and jogging. Most Sundays, the capital’s busy thoroughfare is transformed into a sea of humanity as the early risers enjoy the car-free roads.This is the perfect time not just to get in a few hours of exercise but also to gauge the country’s mood as it heads into what will be an extremely busy political year. Indonesians are optimistic these days as the country basks in the global spotlight. The economy may have slowed over the past few months and is unlikely to record the 6 percent growth this year that it has registered in the past four years. But consumption remains strong and domestic spending is still buoyant.

The emergence of the middle class and its tremendous potential, according to a recent report by CLSA, an investment banking company, has been the main driver of growth over the past five years. There are an estimated 50 million Indonesians who ate today considered to be middle class. This number is expected to triple over the next 20 years, creating one of the largest domestic markets in the world.

The CLSA report notes that middle-class households spend 30 percent of their income on housing and 20 percent on food and household items. Transportation takes up 13 percent and entertainment 10 percent. Education only takes up 2 percent while health care takes up 9 percent.

The definition of the middle class, however, remains rather loose. By and large, the middle class in Indonesia includes the lower middle class, for whom food takes up a larger chunk of the household budget. This group is therefore highly sensitive to increases in the price of foods such as beef and vegetables.

But although inflation has risen in the past three months, mainly because of the depreciation of the rupiah, the Indonesian consumer remains resilient and consumer confidence remains high.

In a political year, however, nothing can be taken for granted, which is why President Susilo Bambang Yudhoyono moved with lightning speed to admonish state-owned energy company Pertamina for unilaterally raising the price of 12-kilogram canisters of liquefied petroleum gas, typically used for cooking, citing an unnecessary burden on the people. Pertamina was well within its legal rights to raise the price, given that it has been incurring heavy losses on the product.

No political leader, especially one standing in the legislative election in April or the presidential election in July can afford to be seen as being insensitive, or worse, unsympathetic, to the aspirations and concerns of the growing influential middle class. But consumers will have to brace themselves for significant price increases this year as producers and importers adjust to the new level of the rupiah against the US dollar.

The Indonesian currency has been one of the worst performers internationally over the past 12 months, depreciating by more than 20 percent against the greenback. This means that apart from LPG, consumers will have to pay more for electricity; electronic goods such as cellphones; clothing; and food.

With the US expected to accelerate its tapering policy in the coming months, the rupiah is unlikely to strengthen before the elections in April or July. Politicians vying for public office must therefore attempt to convince voters that they will do everything in their power to keep prices from rising, even if it means expanding the budget deficit.

This brings us to the question of just how much the economy will affect the public mood and thus influence the political climate. The short-term economic outlook in 2014 does not look too promising as the headline numbers are still in negative territory, which means consumer confidence could slide by mid-year.

So while the presidential candidates keep their sights firmly fixed on the long term and fulfilling Indonesia’s undoubted potential, they must also find answers to the country’s shorter-term challenges. The voters, especially the lower middle class, will be more concerned about whether they can continue to afford the few luxuries they have enjoyed to date.

The 2014 elections will be defining in many ways. They will mark the transfer of power to a new cohort of political leaders who have cut their teeth in the post-Suharto era; the emergence of 40 million young voters, many of whom will be voting for the first time; and they will determine whether Indonesia takes off and becomes a developed economy.

Politics has a great deal of influence on the economy, but the economy will also influence politics in 2014. The candidate who can best meet the aspirations of the people, especially the new middle class, stands the best chance of winning. The name of the game may no longer just be personality, but the ability to deliver prosperity.