Indonesia markets reopen as shifting Iran headlines spur caution

[MELBOURNE] Indonesia’s markets are likely to grapple with fluctuating sentiment when they reopen on Wednesday (Mar 25) after a week-long holiday, as investors weigh rapidly shifting headlines on the Iran war and persistent concerns over fiscal and governance risks.

A US-listed exchange-traded fund tracking Indonesia’s stocks has slid about 2 per cent since markets closed for Lebaran, the holiday marking the end of Ramadan. An Asean stock gauge fell 1.8 per cent during the break. Offshore rupiah forwards rose only about 0.3 per cent higher despite the central bank’s intervention late last week to stem currency weakness, underscoring investors’ reluctance to price in relief.

The moves suggest Indonesia’s cash markets will likely fluctuate amid Iran-war tensions, as US President Donald Trump signals progress in Iran war negotiations even while deploying more troops to the Middle East. Elevated oil prices are adding to concerns after global ratings agencies cut the country’s credit rating outlook and MSCI warned of a potential downgrade of its market status pending reforms to improve liquidity.

Oil prices have largely held firm, though they slipped on Wednesday after Trump said that Iran had offered a “present” as a show of good faith in negotiations. Inflation risks from elevated oil prices “complicate the policy backdrop, potentially raising the hurdle for regulators to push through proposed capital market reforms”, said Gary Tan, portfolio manager at Allspring Global Investments in Singapore.

Before the holiday, the Jakarta Composite Index was the world’s worst performer this year, sliding more than 20 per cent from its January peak into bear market territory amid concerns over earnings and economic growth.

The rupiah and Indonesian bonds have also come under pressure. The currency weakened past levels seen during the Asian Financial Crisis to hit a record low after the credit rating agencies flagged eroding fiscal and policy credibility. Investor sentiment worsened after a government official acknowledged it’d be difficult to keep the fiscal deficit within the 3 per cent of GDP legal limit.

Indonesia’s bond market has seen a net US$1 billion outflow this month, on track for the largest since October. Global funds have also sold US$510 million of the nation’s stocks this year on a net basis, heading for the biggest quarterly outflow since June.

A small reprieve may be in sight, with Trump seeking to negotiate with Iran and oil trading below its earlier peak. Indonesia also benefits from its status as a coal and palm oil exporter, while Bank Indonesia has also tightened rules on dollar purchases to stem rupiah pressure.

Sentiment remains fragile, but a lot of “bad news” is priced in, said Mohit Mirpuri, senior partner at SGMC Capital in Singapore. “If the belief is that it is not a real macro breakdown or a systemic crisis such as 1997 or 2008, history suggests recovery rather than collapse.”

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Still, markets are likely to remain volatile in the near term as domestic pressures linger and Iran continues to limit shipping through the Strait of Hormuz.

“We have general pressures across all asset classes in Asia as the physical consequences of the closure of the Strait of Hormuz are beginning to manifest,” said Philip McNicholas, Asia sovereign strategist at Robeco in Singapore. “Indonesia is unlikely to buck that trend.” BLOOMBERG