SINGAPORE (May 8): The Indonesian economy has been performing well relative to most large emerging economies such as Brazil, Mexico or Russia. But its growth, at 5% in 2016 and 4.9% in 2015, is well below what it is capable of and pales beside China and India, raising questions over what is holding this potential global dynamo back. In recent weeks, these niggling concerns have been compounded by worries about rising political risk, following the defeat of the progressive but controversial incumbent governor of Jakarta in his re-election attempt.

Our view is modestly positive. We see political risks being contained and a cyclical pickup in economic growth as likely. The longer-term underperformance of the economy will take longer to reverse, but policy changes are beginning to address some of the constraints on economic growth.

Should we worry about political risks?
At one level, the victory of Anies Baswedan should not by itself be seen as a setback. Anies is a former education minister and a highly respected academic known for his moderate views; his running mate, Sandiago Uno, is a young, impressive and dynamic business leader. The nature of their victory, however, is what is worrying many long-time observers of Indonesia. The incumbent governor, Basuki Purnama, or Ahok as he is commonly known, had built a good reputation for getting things done and delivering progress to the long-suffering citizens of Jakarta. It was this performance that gave him an initially comfortable lead in opinion polls even though he was a double minority in being a Chinese and a Christian in a Muslim-majority city and despite his occasionally abrasive style.

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