The General Elections Commission (KPU) has officially declared Joko '€œJokowi'€ Widodo and Jusuf Kalla president- and vice president-elect. As expected, the financial market has reacted to the announcement.

One week prior to the announcement, the Jakarta Composite Index (IHSG) slightly increased by 0.3 percent, from 5,070 to 5,087. The rupiah was traded at around Rp 11,570-11,605 per US dollar, the 10-year government bond yield was around 8.05 percent, and foreign investors'€™ short-term inflow to the stock market had reached Rp 2.5 trillion.

One week after, the stock market index jumped to the range of 5,083 to 5,127, while the rupiah slightly appreciated by 0.2 percent to 11,580, and foreign investors in the stock market posted accumulated net buying of Rp1.07 trillion.

Compared to previous elections, there was relatively little impact on the financial market. For example, during the 2004 election, the stock market index jumped 5.5 percent from the level it stood a week before the result announcement, while the rupiah appreciated 1.6 percent and foreign investors in the stock market posted net buying of Rp 576.4 billion. One week after, the stock market index slightly fell by 0.1 percent (compared to the level at the date of announcement), while the rupiah was stable at 9,080 and foreign investors in the stock market posted net buying of Rp 370 billion.

During the 2009 election, the stock market index was up 0.8 percent compared to its level a week before the result announcement, while the rupiah appreciated 0.4 percent and foreign investors in the stock market posted net selling of Rp 2.6 trillion. One week after, the stock market index fell 1.3 percent, the rupiah slightly appreciated by 0.3 percent and foreign investors posted net buying of Rp 42.5 billion.

Currently, the global stock market is showing positive trends on the expectation of improving conditions in the US economy. Capital flows into the emerging market have become very supportive, as has foreign direct investment. The latest data from the Institute of International Finance (IIF) showed that portfolio flows into emerging markets were estimated at $89 billion, while direct investment was estimated at $321 billion.

Capital inflows into Emerging Asia are expected to remain strong. According to IIF, the region is set to continue to account for more than half of total capital flows to emerging markets, underpinned by solid growth prospects. Most emerging stock markets indices posted strong performances this year. The stock indexes of India, the Philippines and Thailand year-to-date have increased 22.3 percent, 16.6 percent, and 15.7 percent, respectively. Emerging market currencies have also been improving. The Brazilian peso, Malaysian ringgit, Philippine peso and Thai baht appreciated by 4.9 percent, 2.5 percent, 1.7 percent, and 2 percent, respectively.

The Indonesian stock market and government bonds have performed strongly throughout the year. As of the end of July, the JCI had risen 19.8 percent compared to last year'€™s closing.

At the same time, the government bond yield has fallen 43.5 percent to 8.12 percent, while the rupiah has appreciated by 4.9 percent to 11,575 per dollar. Total foreign fund inflow to domestic stock markets and government bond markets reached Rp 144.9 trillion ($12.5 billion) year-to-date until July 2014, each by Rp 56.7 trillion ($4.9 trillion) in the stock market and Rp 88.2 trillion ($7.6 billion) in the government bond market.

On the other hand, in the banking sector, Indonesian banks experienced slower loan growth after Bank Indonesia (BI) tightened its monetary policy in June 2013. Until May 2014, loan growth continued to slow to 17.9 percent from 19 percent in the previous month. Meanwhile, in the same period, third party funds (TPF) grew 12.4 percent, slightly higher compared to 12 percent in the previous month. But we expect the Indonesian banking sector to remain stable over the next six to nine months. Mandiri Banking Pressure Index (MBPI), a leading indicator of banking sector performance in Indonesia, posted an upward trend to 102 in May 2014 from 94.5 in the previous month (a number between 61 and 103 is normal and below 61 would signal an alert).

Going forward, we still believe that the Indonesian financial market still has opportunities to perform better. However, there are still many risks, externally and internally.

The end of the US Fed'€™s tapering policy around October 2014 could create speculation that the Federal funds rate will be raised faster than market expectation. The increasing US benchmark rate could create sudden capital reversal and cause volatility in emerging markets, including Indonesian financial markets. The second global risk will be coming from volatility in the emerging markets.

Current debt default in Argentina escalated the concern that emerging markets are still at risk. This would likely cause global stock markets to fluctuate and also affect the domestic market. Another global risk is the crisis in Ukraine, which could result in sanctions against Russia. This could hurt the global economy because Russia is a large market for many international corporations.

Internally, there are also a few things that the market will be watching closely. First is the creation of the new Cabinet. Second is how the new government handles the fuel subsidy issue. Third is the development of an economic indicator that still brings concerns for investors, like slowing gross domestic product (GDP) growth and the current-account deficit. On the monetary side, the economic team of Bank Mandiri Group expects BI to maintain its tightening stance and believes there is a probability that the central bank will raise the benchmark rate as much as 25 basis points (bps) if the risk from external imbalance escalates. If policymakers can handle those risks well, then there will be a chance that the financial market reacts positively, resulting in more foreign capital inflow to the Indonesian market.

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The writer is a financial market analyst at Bank Mandiri

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