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Tough juggle ahead for Indonesia’s new president

Romeo Gacad | AFP | Getty Images

Hopes are running high for Indonesia's newly-elected president Joko Widodo, however the charismatic Jakarta governor's relatively narrow victory means he now faces the onerous task of implementing reforms while appeasing coalition partners.

53-year-old Widodo, or more popularly known as "Jokowi," emerged victorious in the country's July 9 presidential elections with a margin of more than 6 percentage points over his rival former general Prabowo Subianto. It was one of the most closely-contested elections in the country's democratic history.

"A narrow victory for Jokowi may not be sufficient to empower the newly-elected president to carry out all the desired," Kunal Kundu, economist at Societe Generale, wrote in a report, noting that a victory margin of at least 10 percent would have helped to remove the cloud of political uncertainty.

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Jokowi has inherited an economy that is in urgent need of reforms to put it on a sustainable growth path, including cutting fuel subsidies to free up cash for sorely-needed infrastructure investment. Fuel subsidies are among Indonesia's biggest budget expenditures – greater than healthcare and infrastructure spending, according to IHS.

"Satisfying the demands of coalition partners and keeping a workable coalition together is likely to be a constraint on policy reform for the country's next government," added Goldman Sachs economists Andrew Tilton and Mallika Chawla.

According to Mark Matthews, head of research for Asia at Bank Julius Baer, with just 37 percent representation in parliament, Jokowi's coalition won't be as effective as its counterpart in India.

During India's general elections in May, the National Democratic Alliance (NDA) government led by Prime Minister Narendra Modi won 62 percent of seats in the lower house of parliament.

Read MoreIndonesia stockskeep rally going ahead of vote results

"It doesn't mean he can't get anything done, it would certainly mean a lot more horse trading and that would be dilutive to the reform process," he added.

Indonesia's new leader is scheduled to be sworn into power on October 20, when he will have to figure out which parties to lure into backing his government and who to include in his cabinet.

However, Prabowo's move to withdraw from the presidential race – on grounds of "systemic fraud" in the election – hours before the official results were announced and decision on Wednesday to contest the results in the constitutional court has cast some doubt over the timing of the transfer of power to Jokowi, say analysts.

"In the past, no presidential candidate has ever withdrawn his/her candidacy from election and so this withdrawal could lead to further delay and ambiguity in transfer of power to the new president," said Tilton and Chawla.

Read MorePotholes, blackouts beset Indonesia's next leader

Despite the uncertainty, investors appeared to keep their cool, with the benchmark Jakarta Composite trading up 0.5 percent on Wednesday.

Helmi Arman, strategist at Citi, said any ruling by the constitutional court is unlikely to materially impact the outcome of the election.

As for the impact on markets, Arman said the "uncertainty over leadership change has subsided, which should be taken positively."

Even so, Matthews, who has a neutral rating on Indonesian equities, says he is waiting until there is more clarity over Prabowo's next steps before increasing exposure to the market.

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