Update COVID-19 in Indonesia: 365,240 confirmed infections, 12,617 deaths (19 October 2020)
19 October 2020 (closed)
USD/IDR (14,690) +0.00 +0.00%
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Jakarta Composite Index (5,126.33) +22.92 +0.45%
The result of Indonesia’s presidential election (scheduled for 9 July 2014), which has become a tight race between Prabowo Subianto and Joko Widodo (Jokowi), will for sure have a large impact on foreign investors’ confidence in Indonesian politics and the economy. A few weeks ago, a survey of Deutsche Bank showed that a majority of respondents (consisting of foreign investors) intend to sell their Indonesian assets if controversial candidate Prabowo Subianto will be elected. What are foreigners’ perceptions of a Subianto win?
Research conducted by Manhattan-based financial institution Morgan Stanley indicates that foreign market participants hope to see Joko Widodo to become next president of Indonesia because he is considered more reform-minded than his rival. The clearest piece of evidence that Jokowi can rely on the support of the market was seen on 14 March 2014 when Jokowi officially announced his candidacy for the 2014 presidential election. Immediately after his announcement, the benchmark stock index of Indonesia climbed more than three percent, joined by rupiah stabilization (previously the currency had been experiencing a weakening trend against the US dollar). However, if Prabowo Subianto will be elected, then Morgan Stanley expects to see large capital outflows, pushing the rupiah to the level of IDR 12,300 per US dollar.
The market is generally not in favour of Subianto due to his controversial background. As army leader during the authoritarian New Order regime, headed by President Suharto (then father-in-law of Subianto), Subianto was linked to human rights violations on more than one occasion (in Jakarta and East Timor). Moreover, he belonged to the inner circle of Suharto. This circle has, allegedly, assembled great wealth and business empires through corruption and nepotism.
Moreover, both Subianto and his running mate, vice presidential candidate Hatta Rajasa, have been stressing the importance of nationalism and protectionism in their campaigns (as this is expected to increase their popularity). In a response to this campaign strategy - and in an attempt not to lose out on voters - Jokowi has also shifted to a more nationalist approach. Although such protectionist speech is a concern to foreign investors, it may be mere rhetoric ahead of the election as foreign investment is needed to support economic growth and provide employment opportunities to Indonesians.
The report of Morgan Stanley also noted that Jokowi will have to face a divided political power if elected because the April 2014 legislative election showed a fragmented outcome. Moreover, a large coalition of political parties (Golkar, Gerindra, Democratic Party, National Mandate Party, Justice Development Party, and Prosperous Justice Party, which together received around 57 percent of the vote in the legislative election) have thrown their support behind Subianto in the presidential election.
However, in an earlier released report titled “Indonesia Economics and Strategy - the Election Square-Off”, released on 26 June 2014, Morgan Stanley stated that it is less concerned about the outcome of the presidential election as it sees strong democratic fabric in Indonesia and a low likelihood of significant economic changes after the election. Still, market reaction to the political outcome may be exaggerated as “based on investor feedback, it appears that the market could undershoot its fundamentals with a Prabowo Subianto victory and overshoot its fundamentals with a Joko Widodo (Jokowi) victory.”
A broker at asset management firm Sucorinvest Central Gani (Sucorinvest) added that market players are concerned about Subianto’s subsidized fuels policy after the candidate’s team said it would maintain the current prices of subsidized fuels, instead opting to increase tax revenue and the country’s debt-to-GDP ratio to finance expensive oil imports. Currently the debt-to-GDP ratio of Indonesia is about 26 percent. Previously, Subianto said that he may want to double this ratio. Market participants are concerned because such a strategy (a move away from fiscal stability) will certainly affect Indonesia's debt rating and this can have serious consequences when the Fed Rate will be raised (capital outflows). Furthermore, given the high proportion of foreign ownership of Indonesian sovereign debt, the bond market can come under pressure of globally rising rates and a loose domestic fiscal stance, thus impacting negatively on the rupiah exchange rate.
Initially, Jokowi had a large lead in the popularity surveys. However, in the past months this lead narrowed rapidly. This narrowing gap is reportedly one of the reasons why the Indonesian rupiah exchange rate has weakened and the benchmark stock index (Jakarta Composite Index) moved sideways in recent months.
Jakarta Composite Index:
US Dollar to Indonesian Rupiah:| Source: Bank Indonesia