Market turmoil: People sit near street food vendors in Jakarta. Overseas investors have already pulled US$1.6bil from Indonesian stocks on a net basis this year amid broader pressures from a stronger dollar and rising trade tensions. — AFP
JAKARTA: It wasn’t supposed to unfold this way. Just over a year ago, optimism about Indonesia was running high, with investors expecting Prabowo Subianto to extend former president Joko Widodo’s pro-business policies.
Instead, they are now grappling with shifting priorities as Prabowo’s costly welfare plans strain the nation’s finances and threaten to sap economic activity.
These concerns contributed to a rout in the nation’s stocks Tuesday, sparking the first trading halt since the pandemic and prompting the central bank to defend the rupiah.
“People were expecting the new president to continue on with that agenda, and instead they have seen a transition toward a new priority,” said Change Global Investment LLC managing director Thea Jamison.
“And that priority is still yet to be truly defined and articulated.”
The turmoil has added to doubts about the investability of South-East Asia’s largest equities market, which is down 21% from a September peak and ranks among the world’s worst performers this year.
Tuesday’s action was also fuelled by speculation over veteran Finance Minister Sri Mulyani Indrawati’s potential resignation.
While Sri Mulyani vehemently dispelled the rumours, the speculation came at a precarious moment.
There are concerns about the health of Indonesia’s public finances, including a early-year budget deficit and a 20% drop in state revenues.
The outlook remains uncertain amid unclear budget allocation plans and a lack of new revenue-generating measures.
Prabowo has sought to divert funds into his priority projects, while cutting back on expenditure elsewhere. Adding to the investor unease is the newly launched sovereign wealth fund Danantara, which has a direct reporting line to the president.
The fund’s control over companies making up more than a fifth of the Jakarta Composite Index has stoked fears of political interference and transparency risks.
“Foreign investors are clearly rattled by Prabowo’s troubling signals on budget reallocation and the Finance Ministry’s ability to maintain the overall fiscal discipline,” said Lombard Odier Ltd senior macro strategist Homin Lee.
Overseas investors have already pulled US$1.6bil from Indonesian stocks on a net basis this year amid broader pressures from a stronger dollar and rising trade tensions. The outflows have contributed to the rupiah falling about 2% this year, Asia’s worst-performing currency.
The anxiety has also spread to the bond market. Spreads of dollar bonds issued by Indonesian companies hit their widest level in six months at Tuesday’s close.
Indonesian bank PT Bank Tabungan Negara pulled a planned dollar bond, citing market volatility, according to people familiar with the matter.
Global investors were already backing away from Indonesia’s government bond market. They pulled more than US$1bil out of the market on Monday, the highest net selling in nearly six years, according to data from the finance ministry.
Amid the turmoil, Goldman Sachs Group Inc has downgraded the nation’s equities to market weight from overweight, citing weaker earnings, policy uncertainties, risks to state-owned banks’ profitability as well as a wider fiscal deficit.
“Indonesia has had its own challenges with the new government coming in and the market is looking for direction,” said Chetan Sehgal, a portfolio manager at Franklin Templeton Investments, which is underweight the country’s stocks.
“When you see change, there’s apprehension and it’s only for the government to rebuild its credibility.”
For now, investors are looking ahead to the central bank’s monetary policy meeting yesterday, where policymakers may be moved to unveil measures to further stabilise the financial markets and boost growth. — Bloomberg
