A shock wave went through Indonesia's financial markets on Friday (14/03) after 15:00 local Jakarta time, when it became known that Joko Widodo (popularly known as Jokowi) is joining the presidential race for the July 2014 election. Moreover, he can count on full support from the Indonesian Democratic Party of Struggle (PDI-P), one of Indonesia's largest political parties, led by chairwoman Megawati Soekarnoputri. Few people doubt that Jokowi - current Governor of Jakarta - will be elected as the next president of Indonesia.
Indonesia's benchmark stock index (Jakarta Composite Index) immediately skyrocketed 3.23 percent after the announcement, while the index had been drifting in the red zone before the news had been spread. The Indonesian rupiah exchange rate also showed a direct response to Jokowi's candidacy. During most of the day Indonesia's currency was down against the US dollar but shortly after the news, it appreciated 0.26 percent to IDR 11,356 per US dollar (based on the Bloomberg Dollar Index) at the end of the trading day.
This response is a clear indication that the market is positive toward the nomination (and possible presidency) of Jokowi.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.29 percent on Friday (14/03) to IDR 11,421 per US dollar. However, this rate was set before news about Jokowi's candidacy was published. Therefore, on Monday (17/03), we can expect a stronger JISDOR rate as it will have absorbed the new political context.
But it should not be forgotten that before the 'Jokowi-effect' was felt, Indonesia already showed a positive trend since the start of 2014, effectively escaping the ranks of the fragile five emerging markets. The rupiah is one of the best-performing Asian currencies (against the greenback) tracked by Bloomberg in 2014. The currency appreciated 6.7 percent against the US dollar so far this year, supported by large capital inflows as market participants have renewed confidence in Indonesia's economic fundamentals. A few days ago, Governor of Bank Indonesia Agus Martowardojo said that capital inflows in 2014 amounted IDR 38 trillion (USD $3.3 billion) up to the first week of March. This renewed confidence is mainly based on Indonesia's improving current account deficit as well as the country's easing inflation rate. Furthermore, global uncertainty have somewhat moderated after the Federal Reserve finally confirmed its tapering policy in December 2013 after months of severe market speculation led to capital outflows from emerging economies, including Indonesia. Although further winding down of the Federal Reserve's bond buying program (quantitative easing) remains unknown and the US economic recovery is sending some mixed signals (but showing an improving trend), global investors are now more confident than last year.
Actually, if we take a closer look at capital flows in Indonesia in 2014 (the period between 1 January and the first week of March), limited net outflows can be detected in the first week of March as valuations became expensive and investors preferred to wait & see for further political and economic developments in Indonesia. In that context, some profit taking can be expected. However, after it became known that Jokowi would join the presidential race, this context altered significantly and funds poured into Southeast Asia's largest economy again.
This rally - brought on by the 'Jokowi effect' - is expected to continue for a couple of days before the usual correction follows. However, with political and economic factors improving, I am quite bullish about Indonesia's financial markets for the remainder of 2014. Important data that need to be monitored, however, are the impact of the recently introduced unprocessed minerals export ban on Indonesian exports (and trade balance), as well as international developments such as slowing economic growth of China (one of the most important trading partners of Indonesia) and investors' response to further US quantitative easing tapering.