Amid political uncertainty and a looming increase in US interest rates, Indonesian stocks and the rupiah exchange rate weakened considerably in the past week. Market participants are increasingly concerned about the situation in Indonesia’s parliament where a majority of political parties - named the Merah-Putih coalition (led by defeated presidential candidate Prabowo Subianto) - is expected to undermine president-elect Joko Widodo’s reform programs as well as the democratic foundations of the country.
In the past week, the Widodo camp and Subianto camp in Indonesia’s House of Representatives (DPR) clashed during the voting process for the abolishment of direct voting for mayors, district heads and governors in the regions as well as voting for the position of Speaker in the DPR (and four deputy speakers). In both cases, the Widodo camp lost as his coalition only controls a minority in the DPR.
In the case of the abolishment of direct elections in the regions (leaving it to regional legislatures to elect regional leaders), widespread criticism emerged which made incumbent President Susilo Bambang Yudhoyono decide to issue a presidential decree to override parliament’s approval of the controversial new law.
In the case of the Speaker of parliament, the position went to Setya Novanto (Golkar) supported by the Merah-Putih coalition. During the voting process the four political parties that support Widodo - the National Awakening Party (PKB), People’s Conscience Party (Hanura), the Indonesian Democratic Party of Struggle (PDI-P), and the National Democratic Party (NasDem) - walked out amid the deliberations. Also the positions of deputy speakers went to people within the Merah-Putih coalition.
Due to these developments market participants fear that Widodo’s reform programs (which should lead to a targeted annual economic growth pace of +7 percent) will be blocked by a hostile parliament. Previously, Widodo’s bid for the presidential seat and subsequent victory was the main reason why Indonesian stocks had strengthened to a record high recently. Investors have confidence that Widodo’s economic reform programs can improve the financial and economic fundamentals of Southeast Asia’s largest economy. Now, however, the market starts to doubt about the implementation of his reform programs due to the hostile majority in parliament. Widodo will be inaugurated as Indonesia’s seventh president on 20 October 2014.
The benchmark stock index of Indonesia (Jakarta Composite Index, abbreviated IHSG) fell 3.58 percent in the past week to 4,949.35 points.
Jakarta Composite Index:
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 1.14 percent to IDR 12,144 per US dollar during the past week.
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
Government bonds fell for a fourth consecutive week, with the yield on the notes due March 2024 rising 25 basis points to 8.49 percent.
Foreign investors sold USD $542 million more shares than they bought in September 2014, the largest outflow since June 2013. Negative market sentiments are also caused by looming interest rate hikes in the USA. Emerging economies that are have weaknesses are considered particularly vulnerable to capital outflows. Indonesia is one of these vulnerable countries as it has to cope with a wide current account deficit and relatively low foreign exchange reserves (USD $111.2 billion at the end of August).
Meanwhile, it is expected that Indonesia’s central bank (Bank Indonesia) will maintain its benchmark interest rate (BI rate) at 7.50 percent at the Board of Governor’s Meeting next Tuesday. Since November 2013, the BI rate has been set at 7.50 percent in an effort to combat high inflation (which accelerated sharply after the government raised prices of subsidized fuels in June 2013), and improve the current account balance (which has shown a structural deficit in recent years, mainly due to expensive oil imports). The overnight deposit facility rate (Fasbi) and the lending facility rate are also expected to be kept at the current levels of 5.75 percent and 7.50 percent, respectively. Most analysts expect that the BI rate will be held at 7.50 percent for the rest of the year.