Local Elections Indonesia

Coming Wednesday (27/06) 17 governors, 39 mayors and 115 regents are to be elected in Indonesia, including the nation's four most populous provinces: West Java, East Java, Central Java, and North Sumatra. These local elections can be regarded a run-up to the 2019 (legislative and presidential) elections because nearly half of the Indonesian electorate lives in West Java, East Java and Central Java.

Considering Indonesia is still a young democracy where a variety of forces (which includes religious forces) are combating for political power, elections in Indonesia always bring a degree of uncertainty, including fears of riots or perhaps even terrorist attack by militants who do not approve of the secular government (concern about terrorist attacks in Indonesia have risen after the Surabaya and Pekanbaru attacks in early May 2018). Moreover, the Jakarta gubernatorial election last year exposed deep political, religious, and ethnic division within society.

The race for the 2019 presidential election is also expected to become dirty because opponents of incumbent President Joko Widodo will need to shake up existing conditions (for example by inciting fear among the population through hoaxes or the misuse of religious sentiments) to make themselves more popular (currently Widodo is still enjoying a wide lead in opinion polls).

However, based on elections in recent Indonesian history there have not been any significant disturbances. This is also due to the fact that plenty of security personnel is guarding the election. A conducive election in fact opens room for a small relief rally. Still, with religious tensions currently at a higher level, there is enough reason to be cautious.

Bank Indonesia's June Monetary Policy Meeting

Meanwhile, the central bank of Indonesia (Bank Indonesia) could decide to implement another interest rate hike at the coming Board of Governor's Meeting that is scheduled for Wednesday and Thursday (which would be the second rate hike under newly inaugurated Bank Indonesia Governor Perry Warjiyo and the third one in little over five weeks).

[Update: due to regional elections day, the Board of Governor's Meeting has been moved to Thursday-Friday, 28-29 June]

Since Indonesian markets reopened after the long Idul Fitri holiday, Indonesian assets have been under heavy pressure due to external issues, primarily the Federal Reserve's decision to raise interest rates in mid-June (while signaling that two additional rate hikes are on the way this year), growing concerns about the full breakout of a global trade war (led by the US and China), and the European Central Bank's decision to end its bond-buying program at the end of 2018. Indonesia's benchmark Jakarta Composite Index fell to a one month low, while the Indonesian rupiah passed beyond the IDR 14,100 per US dollar level.

Considering Bank Indonesia Governor Warjiyo has repeatedly emphasized that he would like to be ahead of the curve, we would not be surprised to see another 25 basis points rate hike (to 5.00 percent) at this week's policy meeting. While the Federal Reserve is expected to implement another rate hike in September (thus providing some time for emerging markets to adjust policies), ongoing concerns about the global trade war are currently causing a high degree of uncertainty in markets and therefore trigger capital outflows from emerging markets, including Indonesia.

Another Bank Indonesia rate hike is expected to impact positively on Indonesian assets, including stocks. Although in theory a rate hike would put pressure on stocks because it makes it more costly for listed companies to borrow money for business expansion, we assume that in the existing situation it would strengthen investors' confidence in Indonesian assets (and, after all, Indonesian share prices have become quite competitive since experiencing a severe downward trend since February 2018, thus long-term investors may be eager to come back into the market).

The negative impact of the series of rate hikes would be that Indonesia's macroeconomic expansion, which has already been rather stuck around the 5 percent year-on-year level, comes under pressure. Problematically, Indonesian financial institutions rapidly raise their lending rates when the central bank implements a rate hike, while they are much more hesitant to lower credit rates when the central bank cuts its benchmark interest rate.

To prevent a fall in credit growth due to the recent (and looming future) rate hikes, Bank Indonesia announced it plans to ease the loan-to-value (LTV) ratio for the purchase of property (relaxing down-payment regulations). This would be positive for the mortgage industry as well as Indonesia's property sector. Leading listed banks in Indonesia's mortgage industry are Bank Tabungan Negara and Bank Central Asia. Thus we are also waiting to hear more details about Bank Indonesia's LTV ratio relaxation plans at the coming policy meeting.

This article was written by Richard van der Schaar, Managing Director of Indonesia Investments. He obtained his Masters degree in Southeast Asian Studies from Leiden University (the Netherlands) and now focuses on economic and political developments in Indonesia.