Public consumption increases as a result of political activity, from the preparation to the implementation of elections, including government spending on organizing elections and campaign spending. This can be seen from previous elections. A large budget for elections is allocated for the procurement of logistics, goods and services. Spending and consumption from the central level to ad hoc bodies will increase people's purchasing power.
The food and beverage, textile and textile products (TPT), accommodation, and transportation sectors will experience increased demand as a result of the election. In addition, elections increase labor-intensive businesses of small and medium-sized communities. For example, through efforts made in printing, confectionery, communications and advertising, and other fields that contribute to the development and dissemination of information about the electoral process. Meanwhile, the budget allocation for the 2024 General Election increased by 57.3% compared to the previous year, around 25.59 trillion. The increase in the number of political parties and voters also led to this budget increase. Indonesia's election budget ballooned due to regulatory changes and regional expansion.
GDP and Household Consumption Effects
Indirectly, elections stimulate an increase in people's income as they contribute to gross domestic product (GDP) growth. Elections affect the increase in consumption in the current quarter period, but tend to fall before and after the election. Judging from the trend of real GDP in the previous election period, economic growth tends to slow down until two quarters before the election, then stabilize and finally strengthen. The cautious attitude of economic actors ahead of the election cycle due to possible changes in regulations and economic agendas is a driving factor in this phenomenon.
Effects on Inflation and Government Spending
In the quarter before an election, government spending tends to slow down until it eventually increases. This applies to both nominal and real fiscal spending. Meanwhile, the inflation trend at the time of the election is also influenced by the increase in global commodity prices and fuel prices during the year. Monetary policy responses in these periods are driven by a combination of managing inflation, currency movements and the changing growth trajectory.
Effects on Exchange Rates and Money Circulation
In terms of currency, the exchange rate of the US dollar against the rupiah tends to weaken ahead of elections, then hold, and then strengthen again after elections. In addition, participation in elections increases money supply during the quarters leading up to and during elections, but is negative in the post-election period. According to BI, the amount of money circulating in the community during the 2014 and 2019 elections increased from Rp23 trillion to Rp52 trillion. The money in question is cash owned by the public, electronic money, and withdrawable savings (M1). Meanwhile, quasi-money (savings, time deposits, current accounts, etc.) was one of the components that decreased.
Effects on Investment and FDI Flows
Investment tends to decline during elections which can lead to an economic slowdown. The higher the (political) uncertainty, the greater the investment correction. Foreign direct investment (FDI) flows tend to decline and become neutral until one quarter after the election. This indicates caution towards the election outcome and its impact on regulations, reforms and an open business climate. In terms of the JCI, elections usually have a negative impact in the month before and during the election, but the index then increases one month after the election.
Trend Bearish
The impact on the stock market due to the election caused a bearish trend. Bearish is a term used to describe market conditions when there is a lot of selling and the market is declining or weakening. The bearish trend that occurs before the election can be caused by the need for large funds related to the socialization of elections or campaigns. Nonetheless, there are 2 policy patterns that companies generally take in response to elections, namely:
The first pattern: due to uncertainty and the risk of policy discontinuity, companies tend to increase liquidity and postpone investment decisions to maintain their financial flexibility in the year before the election. Companies tend to be reluctant to submit credit requests to banks because they tend to wait and see to invest or expand. As a result, the use of credit ceilings is not maximized by entrepreneurs so that banks have enough money saved.
The second pattern: in the election year, companies will reduce liquidity and increase investment by converting liquid assets into illiquid assets, such as equipment, plant and property. This is done to mitigate the risk of politicians utilizing these liquid assets as a source of campaign funding.
