When the deadline for Indonesian presidential and vice presidential nominations closed on October 25 2023, three pairs were left to contest for seats. The impact of the election and the policy direction taken by the successful candidates will need to be carefully managed through financial and monetary policy.
Elections impact several components of Indonesia’s gross domestic product. In 2019, consumption increased until one quarter before the election in May, after which it dropped. Public consumption then grew to 5.18 per cent in the second quarter before falling to 4.97 per cent in the fourth quarter due to consumption losing momentum and resuming its normal trajectory. Investment also decreased before and after the election, falling from 5.03 per cent in the first quarter to 4.08 per cent in the fourth quarter, reflecting uncertainty towards the new government.
In the capital market, the Indonesia Composite Index (IHSG) fell before the election. The IHSG stood at 4872 before the 2014 election, jumping to 5032 after the president’s confirmation. Following the 2019 election, the IHSG increased by 0.4 per cent to 6507 the next day. Yet a dramatic drop to 5900 on the day of the election — caused by political riots — lasted until the presidential winner was announced.
Investors often follow the ‘wait and see’ approach, where they reduce share purchases and sell before an election. Investors then monitor the conditions — including new policy decisions — before making financial commitments. This may have a detrimental influence on the IHSG if the 2024 election results in decisions inconsistent with market expectations.
A shock could happen before, during or after the election in various regions, particularly in North Sumatra and East Java, where the prices of essential commodities rose during and after the 2019 election. During that time, the cost of red chillies in Medan City increased by 80 per cent to 45,000 Indonesian rupiah (US$2.88) per kilogram, with cayenne peppers following suit at 75 per cent and garlic at 28.57 per cent.
The price surge also occurred after the 2014 election, with food items increasing 10.38 per cent on average in Bengkulu. The Indonesian government might implement several strategic policies to tackle this.
The government can ensure the availability of the State Budget (APBN) and include an automatic adjustment (AA) in 2024, as it did during the COVID-19 pandemic recovery period. AA is a process where the government budget is temporarily blocked to overcome conditions of uncertainty. It is critical to establish these reserves to deal with the upheavals and uncertainties that will inevitably arise. If there is an economic shock during the election period, the government can neutralise it using previous reserves.
The AA process is carried out through a non-priority budget to avoid disrupting government business operations. This is to maintain priority spending allocations and the APBN’s duty as a social protection instrument for vulnerable areas, national economic recovery and structural transformation. Employee expenses, official travel expenses, honorariums and other items that can be made more efficient will be reserved by the AA.
AA does not burden ministries or government agencies, as the budget reserve represents just 5 per cent of the entire budget. If there is no significant increase in urgent budget needs by the end of the second quarter, the government can submit a proposal to gradually unblock the budget through a revision mechanism. The opened budget allocation can be utilised to conduct the same activities as the initial allocation or for more strategic activities.
Bank Indonesia (BI) also has an important role to play. It is adopting the twist operation strategy as part of the government’s monetary policy to address the uncertain domestic investment climate. Conflicts that cultivate during the election period make investors hesitant to put their money into Indonesia, raising capital outflow from the country. The twist operation is paired with a secondary market buying and selling mechanism for government securities (SBN) to keep investors interested. In doing so, BI is stimulating investor interest in the secondary market by offering SBNs with short maturities. This lure has been improved by increasing the SBN yield.
Short tenors with high results have piqued the interest of investors in depositing funds with BI, mainly commercial banks. This leads commercial banks to raise interest rates on deposits so that consumers can save money, command the money supply and avert inflation linked to the election result. BI intends to acquire long-term tenor SBN on the secondary market to keep long-term SBN yields competitive to entice investors.
If the twist operation strategy cannot maintain the stability of the Indonesian rupiah, BI can apply triple intervention. This policy focuses on intervention in the spot market and domestic non-deliverable forward transactions to calm market conditions by protecting the value of the Indonesian rupiah. Non-deliverable forward transactions benefit parties who agree on an exchange rate greater than the reference exchange rate at the time of the fixing date.
Fiscal and monetary policies must be harmonious and sustainable to maintain economic stability during the presidential election period. The Ministry of Finance — the actor of fiscal policy — and BI — the main actor of monetary policy — can work together to create conducive economic conditions.
Muhammad Bakri is Data and Finance Analyst at the Audit Board of Indonesia.
Yohanes Adiwicaksana is staff at the Coordinating Ministry for Economic Affairs of the Republic of Indonesia.