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Jokowi premium vanishes from Indonesia assets as foreigners exit
[JAKARTA/KUALA LUMPUR] Joko Widodo's honeymoon with international investors is ending as Indonesian stocks tumble and the rupiah weakens at the fastest pace in Asia.
After starting his presidential term last October with market-friendly cuts to fuel subsidies, Widodo has come under fire for his handling of a contentious police-chief appointment and executions of foreign citizens that hurt ties with trading partners. The controversies may make it difficult for the president, whose coalition holds a minority in parliament, to gain traction on policies designed to revive Southeast Asia's biggest economy.
That's straining the patience of overseas money managers after they propelled the Jakarta Composite Index to an all-time high on April 7. The benchmark equity gauge has since tumbled 8.6 per cent as foreign funds cut holdings, while Indonesia's government raised less than half its target from a bond auction on Tuesday. Currency strategists are more bearish on the rupiah than any of its regional peers.
"It's difficult to find anything positive to mention on the political or economic front in Indonesia," said Michael Every, the head of financial markets research at Rabobank Group in Hong Kong. "It's getting increasingly hard to justify any kind of 'Jokowi' premium," he said, referring to Widodo's nickname.
Investor concern was most visible on Wednesday in the stock market, with the Jakarta Composite falling 2.6 per cent to the lowest close since Dec 17. The rupiah strengthened 0.3 per cent to 12,944 against the dollar, paring this year's drop to 4.3 per cent, while the yield on 10-year government notes fell five basis points to 7.74 per cent.
The Jakarta gauge dropped another 1.3 per cent at 9:07 am local time on Thursday, while the rupiah slipped less than 0.1 per cent.
Indonesia executed seven foreigners for drug smuggling on Wednesday, prompting Australia - a major importer of Indonesia's petroleum - to recall its ambassador and warn that the deaths had damaged relations. Two-way merchandise trade between the two countries reached A$12.1 billion (US$9.7 billion) in the year to June 30, 2014.
"The executions are not very foreign-investor friendly," said Mr Every at Rabobank.
The president's popularity had already been falling amid a fight between police and the anti-corruption agency, known as the KPK, over the suitability of Jokowi's nomination for police chief. The dispute led to the suspension of the KPK's chairman and undermined Jokowi's image as a politician who will tackle graft and reform state institutions.
At the same time, his ministers have announced rules that could make it harder to do business, including a ban on selling beer in convenience stores and a plan to require foreign workers to pass Indonesian language tests, which was later withdrawn.
"The message that investors are getting is that the president doesn't yet have the political weight," Paul Rowland, a Jakarta-based independent political analyst, said in an interview. "There's a question mark over his ability to deliver on some kinds of reform."
The drop in stocks is "seasonal" and not due to government policies or the executions, Juda Agung, executive director for monetary policy at Bank Indonesia, said in Jakarta on Wednesday. "Investors wait and see as first-quarter corporate financial reports were below target, but we hope with stronger GDP and better fundamentals in the second quarter, investors will come back."
Jokowi's political challenges have escalated at a time of growing concern over the strength of economic growth and corporate profits. The government's goal of boosting expansion to 5.7 per cent this year, from a five-year low of 5.02 per cent in 2014, will be difficult to achieve, Coordinating Minister for Economic Affairs Sofyan Djalil said on April 21.
A majority of companies in the benchmark stock index, including conglomerate PT Astra International, have reported falling first-quarter profits.
The impact of Jokowi's policies should be judged over years, not months, according to Alan Richardson, an investment manager at Samsung Asset Management Co. The president wants to raise budget funds to build ports, roads and railways - projects that take time to translate into economic growth.
There are some signs of early success. Foreign direct investment into Indonesia quickened in the first full quarter since Jokowi became president, rising 14 percent in the first three months of 2015 from a year earlier. He scrapped gasoline subsidies in January to free up government funds for spending on transportation and other works.
"To expect results within six months of his presidency is unrealistic," Mr Richardson said.
In the meantime, the Hong Kong-based money manager has been reducing holdings in Indonesia because of disappointing corporate earnings. Foreign funds pulled US$537 million from the nation's stocks in the past six days alone, a period when the benchmark index sank 6.5 per cent.
The Jakarta gauge is now valued at 14.4 times estimated earnings for the next 12 months, a 3 per cent discount versus the MSCI Southeast Asia Index. That compares with a 7 per cent premium in mid-March.
Indonesia's economy also remains vulnerable to the prospect of rising US interest rates this year. The current account has been in deficit for 13 quarters through the end of 2014 and foreign-exchange reserves relative to gross domestic product are less than half the size of those in Malaysia, Thailand or the Philippines.
That adds to risk in the currency market, where forecasters surveyed by Bloomberg have cut their median estimate for the rupiah's end-2016 exchange rate by 9 percent this year to 13,700 per dollar. The projected drop of 5.5 per cent from Wednesday's closing level is the biggest in Southeast Asia.
Debt investors are pulling back as well, with the finance ministry meeting less than half its 10 trillion rupiah target at an April 28 bond auction. That's the weakest sale result since an offer in June 2013, which happened amid heightened concern about an end to the Fed's bond-buying program.
"People were a little bit too optimistic last year," Divya Devesh, a foreign-exchange strategist at Standard Chartered Plc in Singapore, said in a phone interview. "Some of that optimism seems to have been pared down."