Macro Strategy

Welcoming the New Government

 

  • The new president's inaugural speech emphasized commitment to unity and leadership, economic self-sufficiency and equality for all.
  • The Merah Putih Cabinet formation signal continuity & stability, more specific ministerial responsibilities and a balanced mix of background. 
  • Majority parliamentary support leads to an effective government, particularly in implementing policies that align with key agenda.

 

The Inaugural Remarks. Indonesia has smoothly transitioned to a new administration, welcoming President Prabowo Subianto and Vice President Gibran Rakabuming Raka. The swearing-in ceremony occurred on Sunday morning, followed by the much-anticipated unveiling of the new cabinet later that night, named the Merah Putih Cabinet. During his inaugural address, Prabowo emphasized several important points as key milestones:

  1. Commitment to Unity and Leadership: Prabowo began by affirming his commitment to the Indonesian Constitution and to leading the country with honesty, integrity, and a sense of duty. He emphasized that his leadership would prioritize the interests of all Indonesians, including those who did not support him in the election. He pledged to lead the country with a focus on public service and collective good, ensuring that national decisions would serve the people rather than any personal or narrow political interests.
  2. 2. Economic Self-Sufficiency: A major theme of Prabowo’s speech was his vision for Indonesia to become self-sufficient in key areas, particularly food and energy. He stressed the importance of reducing the country’s reliance on imports, which leaves Indonesia vulnerable during global crises. By utilizing Indonesia’s vast natural resources—such as palm oil, cassava, sugarcane, and geothermal energy—he believes the country can achieve energy independence and become a global food production powerhouse. He set an ambitious target for Indonesia to reach full food self-sufficiency within 4-5 years, highlighting it as a crucial goal for national security and prosperity. Prabowo’s broader “all-commodity down-streaming” agenda may stimulate more active investment in non-metal sectors, particularly in fisheries and marine industries, which have recently gained government focus.
  3. Fighting Corruption and Inequality: Prabowo addressed the persistent issues of corruption, inefficiency, and economic inequality that plague Indonesia. He called for systemic reforms to root out corruption in government and business, with an emphasis on transparency, law enforcement, and digitalization to minimize opportunities for graft. He acknowledged that many Indonesians still live in poverty, with insufficient access to basic needs such as food and education. Prabowo underscored the need to focus on the well-being of the nation's poorest citizens, rather than being complacent with flattering economic statistics. He stressed that economic growth must benefit all Indonesians, not just the elite.
  4. Appeal for National Unity and Cooperation: Throughout his speech, Prabowo urged unity and cooperation among Indonesia’s diverse social and political groups. He warned against internal divisions and prolonged conflicts, stressing that the nation must rise above these issues in order to move forward. Prabowo’s message was one of collaboration and reconciliation, emphasizing that Indonesia's strength lies in its ability to unite as one people, regardless of differences in religion, ethnicity, or political affiliation.
  5. 5. International Relations and Policy: On the global stage, Prabowo reaffirmed Indonesia’s long-standing foreign policy of non-alignment and peaceful diplomacy. He expressed a desire for Indonesia to maintain friendly relations with all countries while firmly rejecting any form of colonialism or oppression. He emphasized that Indonesia should be a good neighbor in the international community while upholding its principles of justice and equality.

 

The Formation of Merah Putih Cabinet. The Merah Putih Cabinet appointments introduce essential components likely to boost investor confidence by signaling continuity, with more ministries assigned specific responsibilities. The new cabinet formation also reflects a balanced mix of politicians and professionals across both minister and vice minister positions. In our view, there are four key points regarding the formation of the cabinet:

 

  1. Several ministers from the previous administration are continuing in Prabowo's cabinet, ensuring both continuity and a smooth transition. The retention of key economic ministers, in our view, is expected to generate a positive response from investors. Prabowo retained the structure and leadership of the Ministry of Finance, while adding an extra vice minister, signaling a continued focus on fiscal stability.
  2. The number of ministries and vice ministers has increased, primarily to accelerate progress on key objectives. A notable change is the expansion of roles related to human development, with the Ministry of Education being divided into multiple ministries to address specific areas of focus. There are now 48 ministerial posts, up from the previous 34 ministries.
  3. The new cabinet formation also reflects a balanced mix of politicians and professionals across both minister and vice minister positions. Based on our initial assessment, 23 ministerial posts are held by politicians, while 28 are held by non-politicians (professionals, businesspeople, civil servants). In the vice-ministerial posts, 32 appointees have non-political backgrounds, while 22 come from political backgrounds (Exh 5).
  4. The swift completion of the State Ministries' nomenclature changes will be the first key milestone, providing a foundation for delivering the critical 100-day programs. As seen during Jokowi’s initial first term, changes to the ministerial structure appeared to create challenges in meeting some key strategic goals.

 

Majority Parliamentary Support Leads to an Effective Government. Prabowo's coalition, the Koalisi Indonesia Maju (KIM), holds a commanding 82% of the seats in Parliament, leaving just 18% to the opposition, which is solely represented by the PDIP. Despite this, PDIP, through House Speaker Puan Maharani, has expressed a willingness to support Prabowo's administration, signaling the potential of no significant opposition in the Parliament. This overwhelming majority allows Prabowo to run an effective government, particularly in implementing policies that align with his agenda. Key programs, such as the Free Nutritious Meals (MBG) initiative and school revitalization, have already been implemented through the 2025 State Budget, with budgets allocated at IDR 71tn for MBG and IDR20tn for school revitalization. A study of the MBG program in 10 cities revealed it resulted in a 33% revenue boost for participating SMEs and the creation of an average of three additional jobs per business. The Ministry of Finance also projects that the MBG initiative could contribute 0.1 percentage points to the expected 5.2% GDP growth target for 2025. The government reiterated that the MBG will begin in the poorest cities or those with high stunting rates.

 

Capital Market – Poised for Further Inflows with the Start of New Government

The 10-year U.S. Treasury yield fluctuated, starting at 4.08% on October 14, dipping to a low of 4.02% on October 16, and then rebounding to 4.08% by end of last week. In contrast, the 2-year U.S. Treasury yield remained steady at 3.95% throughout the period. The yield on the 10-year Indonesian Government Bond (INDOGB) fell by 2 basis points, settling at 6.66%. While the U.S. Dollar Index rose by 0.79% w-w, the IDR appreciated by 0.74%, closing at IDR 15,465 per U.S. Dollar with Indonesia's 5-year Credit Default Swap (CDS) remained stable at 69 basis points during this time.

 

 

Fixed Income Flow – Foreign Buying while Domestic Selling – Foreign ownership in domestic Government Securities (SBN) rose to IDR889tn as of 17 Oct (Thursday last week) underpinned by another weekly inflow of IDR6.09tn with Month-to-date (MTD) inflows reached IDR18.75tn. On the other hand, the banking sector experienced a weekly outflow of IDR4.78tn, contributing to an MTD outflow of IDR27.68tn. Bank Indonesia (excluding Repo transactions) saw weekly outflows of IDR 35.34tn with MTD outflows of IDR5.08tn as BI continue to add position earlier this month. Additionally, mutual funds also experienced a weekly outflow of IDR2.40tn, while the insurance and pension fund sectors reported outflows of IDR1.73tn during the same period.

 

Equity Flow – Foreign Inflows Return. After three consecutive weeks of foreign outflows, the equity market regained interest as foreign inflows surged to IDR1.8tn in the 3rd week of Oct-24. This resulted in a 3.2% w-w increase in the JCI's performance. On a year-to-date basis, outflows in the regular market stood at a mere IDR0.2tn. In last week's trading, BBNI, PANI, TINS, DSSA, and MYOR consistently ranked among the top recipients of inflows. Additionally, BBCA, TLKM, BMRI, BRMS, and PANI also saw strong inflows, boosting their share prices by 3.6%, 5.4%, 3.2%, 23.4%, and 19.0% w-w, respectively.

 

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