New leaders seek higher ground

Indonesia and Thailand, Asean’s two biggest economies by GDP, officially have new leaders. Both countries are in need of a spark.
General Prayuth Chan-ocha
General Prayuth Chan-ocha

After months of uncertainty Indonesia and Thailand, the two biggest economies in the Asean region, officially have new leaders.

Indonesia’s constitutional court on Thursday ratified the election vote that anointed Joko “Jokowi” Widodo president-elect of Indonesia.

Meanwhile General Prayuth Chan-ocha, who led the military coup that ousted Thailand’s previous government, was on Thursday sworn in as prime minister.

Foreign investors are well used to watching these markets with caution and, in truth, the latest events  will probably do little to alter well-worn attitudes.

But markets like certainty and now at least investors have a bit more. This is good because both economies are in need of a spark.

The “appointment” of Chan-ocha by a legislature mainly made up of military and police figures might be seen more cynically than a democratic poll. But the country at least has shed some of the political and social turmoil that helped drag down its economy by a revised 1.9% in the first quarter.

“Unlike the civil fraction seen since late-2013, the one-army-party government’s economic and social policies to support economic growth will likely stay unchallenged,” Wellian Wiranto, an economist and strategist at Oversea-Chinese Banking Corporation, said in a report on Friday.

Foreign and domestic investment, exports, household consumption and tourism all fell in the wake of the violent protests that kicked off last November. As a result, the Thai economy only narrowly missed a technical recession by expanding 0.9% in the second quarter.

Looking up

But in a sign that things may be looking up, the Thai Board of Investment on Thursday approved a new investment strategy for 2015-2021 for domestic and foreign investors.

The BOI aims to create more value-added manufacturing, high-tech and ecological projects while improving research and development and boosting small- and mid-sized enterprises.

In practice this could lead to the scrapping of tax and import duty incentives for certain assembling industries if the projects fail to meet the new criteria. But it also means that the criteria for such incentives will now be linked to the use of advanced technology, the replacement of old machinery and the setting up of R&D facilities, which in theory should help to revitalise the Thai economy.

The country's military junta has also approved several infrastructure projects, noted Wiranto in the OCBC report. These include high-speed rail links to China, the Dawei development – a project to build roads, industrial estates and maritime assets to facilitate an investment relationship with neighbouring Myanmar, plus water management projects.

Xavier Jean, corporate ratings analysts at Standard and Poor’s, told FinanceAsia that investment from domestic firms should remain healthy, especially in the infrastructure, chemical, energy and consumer sectors. But the political situation generally – the junta has not set a timetable for democratic elections – might see foreign investors think twice, he said.

“The new administration has less of a mandate compared with Indonesia and the political foundations look less solid and that could keep foreign investment on the sidelines for a while,” Jean said.

Greater clarity

Widodo (pictured below) might possess a much clearer mandate but he faces myriad issues, including fuel subsidies, an unhappy mining industry and a complicated foreign investment policy. 

The outgoing government began 2014 by delaying, tweaking and implementing its wholly unpopular rules on raw material exports, and then introduced a raft of changes to foreign investment rules at the end of April.

The changes are a mix of positive and negative but in promoting the development of certain high-tech industries, the government is broadly welcoming rather than slamming the door shut.

And the incoming administration has made that sentiment clearer still in the past few weeks, offering the possibility that even the raw material tax law may be watered down.

Wijayanto Samirin (Wija), a policy adviser to Widodo, told FinanceAsia that the underlying problem for the government is the conflict of interest between generating revenue on the one hand and attracting foreign direct investment on the other.

“It seems like the [former] wins. This issue combined with several other cases [during] 2012-2013 has made confidence among foreign investors to invest in Indonesia decline,” he said.

The government said this month that the Indonesian economy grew by 5.12% in the most recent quarter, the slowest growth for five years. But at least now the country has a bona fide president after a lengthy and uncertain election process that refused to die even after the results were announced on July 22. 

Although Widodo’s margin of election victory – 53.15% versus 46.85% – was larger than expected, defeated candidate Prabowo Subianto mounted a legal challenge. This was quashed on Thursday, leaving Widodo clear to start his new job on October 20.

“Investors will want to have better clarity on what his policies will be; how committed he will be to structural reforms and how he will approach the mining ban,” S&P’s Jean said.

The common message emanating from both Thailand and Indonesia is that of a move towards developing high-tech industries rather than relying on their manufacturing supply chain roots.

Both General Chan-ocha and Widodo need to quickly appoint cabinets, which should go some way to increasing confidence further.

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