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'€˜Wait-and-see'€™ investors seek political clarity

Political uncertainty resulting from the outcome of the April 9 election has diminished the attractiveness of rupiah assets, with more fund managers now holding back from investing in Indonesia due to a lack of clarity over the country’s future economic direction

Satria Sambijantoro (The Jakarta Post)
Jakarta
Mon, April 21, 2014

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'€˜Wait-and-see'€™ investors seek political clarity

P

olitical uncertainty resulting from the outcome of the April 9 election has diminished the attractiveness of rupiah assets, with more fund managers now holding back from investing in Indonesia due to a lack of clarity over the country'€™s future economic direction.

The preliminary results of the election were met by a sell-off from investors in the local stocks and bonds market, following news that the Indonesian Democratic Party of Struggle (PDI-P), touted as the most likely next ruling party, failed to perform impressively in the election.

The sheer popularity of PDI-P member Jakarta Governor Joko '€œJokowi'€ Widodo, the strongest contender for the presidency, failed to boost the PDI-P, as it only collected 19 percent of the vote, far below its 27 percent target, according to various unofficial quick counts.

The PDI-P has been sluggish in forming a coalition to support the incoming administration, which would need at least 50 percent plus one of seats in the House of Representatives to govern effectively. So far, it has only succeeded in winning the support of the NasDem Party, with the two parties'€™ combined votes estimated at 25 percent.

Rumors of infighting within the PDI-P, the party executives of which are said to be divided on Jokowi'€™s presidential nomination, might also be spooking investors. In addition, Jokowi remains tight-lipped on his economic programs if he is elected president, providing uncertainty for international stakeholders who have already pinned high hopes on him.

'€œThis uncertainty about the road ahead is affecting investors'€™ appetites for Indonesian assets,'€ said Christian de Guzman, a vice president of the sovereign risk group with Moody'€™s Investors Service.

'€œIf political uncertainty were to undermine investor demand for Indonesia'€™s debt, it would negatively pressure the sovereign'€™s credit profile. The longer the uncertainty continues, the greater these risks become,'€ he warned.

For the first time in nine weeks, the rupiah posted a weekly decline of 0.8 percent to 11,413 per dollar, while in the same period ASEAN currencies on average appreciated 1 percent, analysts from state-run Mandiri Sekuritas wrote in a research note on April 16.

Meanwhile, the Jakarta Composite Index (JCI) plunged 3.16 percent, the steepest decline in eight months, to close at 4,765 on April 10, a day after the election'€™s unofficial results were announced. The JCI closed at 4,897 last Friday.

In the fixed-income assets, the yield on the government'€™s 10-year rupiah bonds climbed eight basis points last week to close at 7.92 percent, the highest level in two weeks, prices from the Inter Dealer Market Association show, as quoted by Bloomberg.

'€œOur clients are not pulling out of Indonesia yet, but, they'€™ll be more cautious from here on to add to their position,'€ Philip McNicholas, an ASEAN economist with BNP Paribas, said recently.

'€œThey will wait to see more clarity on the political front before they decide to do anything, so there'€™s definitely an element of wait-and-see [before reentering the Indonesian market],'€ he added.

Government officials have expressed optimism that the latest situation represents no more than a short-term risk, predicting the fund inflows would again return due to the country'€™s fast-growing economy and its strong fundamentals.

Despite the latest sell-off, Indonesia'€™s equity and fixed-income assets are still the most sought-after investments among fund managers due to their high returns. Official data shows the JCI has advanced by 14 percent year-to-date, while the yield for the government'€™s benchmark 10-year bonds has fallen by 56.7 basis points '€” both the best performers in Asia.

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