On Nov 18, less than a month after starting his term as President of Indonesia, Joko "Jokowi" Widodo (pic) reduced the fuel subsidy by almost one-third, stating that more money has to be ploughed into infrastructure spending to jumpstart the nation's economy.

The fuel subsidy cut earned Jokowi praises from the international investment community. This is evident from the gradual rise of the stock exchange that is up by about 20% year to date.

However, that is the easy part in his journey as president.

Jokowi's biggest challenge for 2015 would be to convince the international community of his reform agenda and convincing them to put money into various infrastructure needs of the world's most populous Muslim country.

By the end of his first five years, Jokowi plans to eradicate slum areas that is currently estimated to house about 12% of the population, achieve 100% connectivity by roads from the current 94%, ensure 100% of the population have access to drinking water and sanitation and reduce the backlog of houses to be built for the people by half from the current 13 million.

These are some of the objectives that Jokowi wants to achieve by 2019 and he cannot do it without foreign investments.

As a nation, Indonesia is the most important cog for Asean to be positioned as an economic bloc. Its huge domestic economy, driven by 240 million people, makes it a "must be present" destination for any investor wanting a slice of the action in Asean.

In fact, DBS Research of Singapore has described Indonesia as the brightest prospect for investment in 2015.

"The reduction in fuel subsidy followed by an aggressive interest rate hike by the central bank as measures that indicate the government is prepared to make hard decisions," it says in a recent note.

However, there are some lingering doubts if Jokowi will continue with his reform initiatives amidst opposition from within. This is because sometimes he is seen as bowing to "nationalist pressures".

An example is the proposed regulation that calls on foreign ownership of banks be capped at 40%, something that has not gone down well with the foreign investors who have put their money in Indonesian banks that is seen as one of the best proxies to the thriving domestic economy. Restriction on ownership is also proposed for plantation companies.

Foreign investments are also not helped by the depreciating rupiah, which went down as the worst performing currency in Asia against the US dollar in 2013. It declined by 26.2% due to the deteriorating government balance sheet where the current account deficit grew to 4.4% of the gross domestic product (GDP).

That year, the rupiah weakened from less than 10,000 per US dollar to more than 12,200 against the US dollar.

But Jokowi's move to reduce the fuel subsidy is expected to improve Indonesia's balance sheet in 2015, where the budget deficit is expected to be less than 2% of GDP while the current account deficit is projected to be 3% of GDP or less.

Indonesia is a net importer of oil and provides a huge subsidy to keep the fuel price relatively lower. The sharp fall in global crude oil prices should help Jokowi continue with his fuel subsidy reforms.

For next year, the government is projecting a GDP growth of about 5.8% while analyst are expecting the rupiah to decline marginally should there be an interest rate hike in the United States.

But DBS feels that Indonesia could be positioned better even if there is a tightening of monetary policies globally.

"In our view, with the bold moves (to reduce subsidy and increase interest rates to curb inflation) one can expect a ratings upgrade by S&P which still rates Indonesia as non-investment grade.

"Funds inflow, rupiah strengthening and lower bond yields should follow in a blue sky scenario.

"This would help mitigate the negative impact from global monetary tightening expecially a rate hike in the US," DBS states in a recent report.

By M SHANMUGAM

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