Why Indonesian Stocks and the Rupiah Continue to Decline on Tuesday?
One day after the official announcement that two pairs will compete in the presidential election (9 July 2014), the benchmark stock index of Indonesia (Jakarta Composite Index or IHSG) and the Indonesian rupiah exchange rate are still in a state of decline. Although yesterday (19/05) the rupiah and IHSG strengthened considerably prior and shortly after Joko "Jokowi" Widodo declared that Jusuf Kalla would be his running mate (the vice-presidential candidate) in the election, markets have been selling Indonesian assets since Monday afternoon.
There are two factors that account for the weak performance of the rupiah and IHSG since Monday afternoon. First of all, market participants engaged in profit taking. Particularly the IHSG surged (more than one percent) on Monday morning as speculation emerged that Jusuf Kalla would be declared the vice-presidential candidate of the PDI-P, NasDem, PKB and Hanura coalition. Kalla is considered market-friendly (similar to Jokowi) and thus has the support of international investors.
Although the Jokowi-Kalla pair is expected to enjoy much more popular support in Indonesia than their rival pair Prabowo Subianto and Hatta Rajasa (who are both considered less market-friendly particularly regarding foreign investment), political uncertainty remained as the Golkar party (the second-largest Indonesian political party based on the April 2014 legislative election) suddenly decided to back the Subianto-Rajasa pair. This means that the coalition that supports Subianto-Rajasa is larger than the coalition that backs Jokowi-Kalla. Although the size of the coalition should not play a large role in the presidential election as the electorate will choose an individual instead of a political party, it does cause some doubts in the minds of investors.
As a result, the rupiah and IHSG lost all their earlier gains on Monday and this decline continued on Tuesday (20/05). After the first trading session ended on Tuesday, the IHSG had fallen 2.21 percent to 4,904.15 points. Meanwhile, the Indonesian rupiah exchange rate had depreciated 0.24 percent to IDR 11,446 per US dollar according to the Bloomberg Dollar Index by 12:00 local Jakarta time on Tuesday.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.79 percent to IDR 11,441 against the US dollar on Tuesday (20/05).
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