Indonesia’s currency and stocks are sliding as investors’ confidence in the country’s next president fades even before he takes office later this month, and fears are growing that the selloff may have further to go.
The rupiah has slumped to its weakest level in eight months, while the country’s benchmark stock index has lost 4.5% over the past three weeks, as of the market’s close Thursday.
The losses are spurred by worries that President-elect Joko Widodo will be unable to follow through on promises to build infrastructure and cut expensive fuel-price subsidies, moves deemed critical to juicing up economic growth and attracting foreign investment.
The latest setback came Tuesday when Indonesian lawmakers selected an opposition politician as the next head of a consultative assembly that has the power to amend the constitution and impeach the country’s president. On Wednesday stocks fell 1.5%.
“The opposition has thus far proven more united than our previous expectation and is bent on using every possible mechanism to deter and derail President-elect Joko Widodo’s potentially progressive reforms,” Nomura said. Foreign investors, whose buying of Indonesian equities has been a support all year, may pull back if expectations are not met, it said.
For now, international money managers say they are sticking with the country, convinced that its long-term growth outlook, driven by a large, young population and growing middle class, is positive.
“In four or five years’ time this will be just noise,” said Monem Salam, president at Saturna Sdn., which manages funds in Indonesia as part of around $4 billion assets under management globally.
But Mr. Salam says there could be short-term volatility, particularly given that global investors are concerned about a possible selloff in emerging markets as the U.S. Federal Reserve prepares to raise interest rates. “You’re talking about a double-whammy that could potentially happen,” he said.
Indonesia’s large current-account deficit and slowing growth may make it vulnerable to outflows—as it was during a long selloff that began in May last year—because its finances are deemed weaker than other fast-growing emerging markets. Last year it was lumped in with South Africa, Brazil, India and Brazil as among the “fragile five” economies, for their vulnerability to outflows. Although the current-account deficit in Indonesia has shrunk, it remains larger as a proportion of gross domestic product than that of other economies in the region.
This year, however, Indonesia has enjoyed strong inflows, particularly from foreign investors won over by a longer-than-expected run of easy money policies in the U.S. and improving economic fundamentals in Indonesia itself. The euphoria was extended by Mr. Widodo’s election win in July, drawing parallels with India where the election win of Narendra Modi has rekindled investor interest.
“At the end of the day the main driver for reforms and change will be the young population. We saw that in India this year and we are starting to see it in other emerging market countries,” said Simon Quijano-Evans, emerging market analyst at German bank Commerzbank AG.
Patricia Ribeiro, senior portfolio manager at American Century Investments in New York, which manages around $140 billion, said the recent political developments had not altered her view of Indonesia. “Markets may initially over react to this [recent political] news,” she said. “But we continue to focus on identifying companies with improving fundamentals and expect our holdings to perform well over the medium to long-term regardless of the recent political developments.”
Singapore’s Fullerton Fund Management, too, is sticking to its investments. “Whilst the market may remain volatile on political news flow, we view that President-elect [Joko] Widodo will be able to carry on with a number of his key reforms, such as infrastructure development, even without a parliamentary majority,” says Michelle Sim, manager of Fullerton’s regional equity fund, part of $9.6 billion it manages globally.
—Ben Otto and Chiara Albanese contributed to this article.
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