Indonesian market rout deepens as Prabowo policy risks mount

[JAKARTA] Indonesian markets tumbled on Thursday (Jun 4), with the rupiah breaching the key 18,000-per-US dollar level and stocks hitting a near six-year low, as mounting policy uncertainty and macro headwinds spooked investors.

The rupiah fell as much as 0.6 per cent, taking its losses this year to about 8 per cent, while the benchmark Jakarta Composite Index slid 5 per cent to the lowest since December 2020 before paring losses. Both assets are Asia’s worst performers this year. Bonds also dropped.

The sell-off comes as investors grow more wary of Indonesia’s economic outlook and fiscal position under President Prabowo Subianto. Elevated oil prices have further strained government finances, while fears of greater state intervention in commodity exports, potential rating pressure and a pending MSCI reclassification decision have driven funds to the sidelines.

The sell-off is “mainly driven by rupiah weakness hitting record lows and pressure from a softer trade balance, especially with higher oil imports”, said Felix Darmawan, an analyst at BCA Sekuritas. “Investors are also getting more concerned about policy risks – including issues around the large-scale free meal programme and potential rating pressures – which is weighing on overall confidence.”

Those concerns were on display on Wednesday, when stocks fell to a five-year low and the rupiah hit another record low despite a lack of fresh catalysts. The slide underscored just how fragile sentiment has become, with investors quick to pull back even in the absence of any triggers.

The abrupt firing this week of the head of Indonesia’s nutrition agency – central to Prabowo’s free meals programme – and a subsequent corruption probe have added to unease.

The local stock exchange moved to calm investors’ nerves, with its acting chief saying on Thursday that the regulators “strongly expect” MSCI to maintain the nation’s emerging market status and that its fundamentals remain strong.

One of the clearest ways these macro worries are playing out is through the local currency, which has hit successive lows this year, leading to repeated intervention efforts from the central bank.

BNP Paribas, MUFG Bank and Mega Capital Sekuritas expect that Bank Indonesia (BI) may raise interest rates as soon as this month.

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On Thursday, BI confirmed that it had stepped into currency markets, with senior deputy governor Destry Damayanti saying in a text message that the central bank would “increase the intensity of its interventions” to ensure orderly market functioning and maintain rupiah stability in line with fundamentals.

A break well beyond 18,000 could accelerate foreign outflows from local stocks and bonds, which has made the level a key test for policymakers seeking to restore confidence in an economy facing mounting headwinds. Global funds have already offloaded US$3.3 billion worth of local stocks this year and another US$653 million worth of bonds.

The 10-year government bond yield edged higher five basis points to 6.75 per cent on Thursday. Since the start of the year, it’s risen more than 60 basis points.

“Until there is further clarity on domestic concerns, such as on export control and MSCI review, the pressure remains on the downside for Indonesia assets,” said Wee Khoon Chong, Asia-Pacific market strategist at BNY.

Concerns about Indonesia’s credit rating resurfaced this week after Coordinating Economic Minister Airlangga Hartarto said that he met representatives from S&P Global Ratings in an “annual meeting”, without specifying when it took place.

He added that the government used the meeting to highlight efforts to sustain economic growth through a range of strategic measures, according to a social media post.

Fitch Ratings and Moody’s Ratings have already revised their outlooks on Indonesia to negative while keeping ratings at investment grade. Some are wary that S&P may also follow suit.

To boost confidence, the central bank has rolled out a series of measures to support the local currency and attract inflows, including issuance of rupiah-denominated bills and tightening requirements for US dollar purchases. Last month, it surprised markets with a 50-basis-point rate hike. Its next policy decision is due on Jun 18.

The central bank’s intensive interventions have come at a cost, though, with the nation’s foreign-exchange reserves falling further in April to the lowest in nearly two years. Fitch has warned that a sharp decline in the reserves coverage might lead to a negative rating action.

Capital market regulators have also rolled out reform measures to boost confidence, though many remain wary about the MSCI’s decision later this month and the removal of several big stocks from its indexes. BLOOMBERG