Market participants are still optimistic due to the solid performance of presidential candidate Joko Widodo, popularly known as Jokowi, in last Saturday’s presidential debate (joined by running mate Jusuf Kalla). Moreover, the most recent surveys indicate that the gap between Jokowi and rival presidential candidate Prabowo Subianto has widened in July, although remains tight at about three to four percentage points. Bearing in mind that there is still a large amount of undecided voters, the outcome of the election is still too close to call.

The current gain of Indonesian stocks and the rupiah can be called excessive as it is not so much based on the economic fundamentals of Southeast Asia’s largest economy but on speculative behaviour ahead of the presidential election. This means that in either case - a Jokowi win or a Subianto win - a sell off can be expected; particularly in the case of a Subianto win, we expect the Indonesian stock and financial markets to plunge sharply. In case of a Jokowi win, the market will probably first extent its gain before profit taking kicks in.

Tomorrow (Wednesday 9 July 2014), the Indonesian people will vote for the new president who will take office in October 2014. In the afternoon, quick count results will become available (which are usually quite accurate) but in case the margin is low then markets will have to wait for the official result on 21 or 22 July 2014 (or August 2014 in case of legal challenges).

Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) appreciated 0.78 percent to IDR 11,695 per US dollar on Tuesday (08/07).

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia

The market is currently less focused on Bank Indonesia’s Bank of Governor’s Meeting on Thursday (10/07). Considering the easing trend of inflation since the start of the year (6.70 percent year-on-year in June 2014) and the USD $69.9 million trade surplus in May 2014, the country’s benchmark interest rate (BI rate) is expected to be maintained at 7.50 percent (despite GDP growth continuing its slowing pace). However, the central bank’s decision will also depend on the results of the Federal Reserve’s latest FOMC meeting (the minutes of which will be released on Wednesday 09/07). If these minutes indicate earlier-than-expected US interest rate hikes and the continued winding down of the Fed’s quantitative easing program, then Bank Indonesia can respond by raising the BI rate as the Fed’s monetary policy is expected to result in capital outflows from emerging economies such as Indonesia.