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ndonesian stocks and the rupiah dropped sharply on Friday amid a heavy selling spree after the House of Representatives passed a law that restores the power to appoint local administrative heads to Regional Legislative Councils (DPRDs).

Financial analysts said the sell-off occurred as investors feared that president-elect Joko 'Jokowi' Widodo would be unable to carry out his economic program given his limited control over the House.

Foreign investors sold Rp 1.4 trillion (US$116 million) worth of Indonesian stocks after the Indonesian Democratic Party of Struggle (PDI-P)-led coalition that backed Jokowi, lost its battle in the House.

The Red-and-White Coalition led by losing presidential candidate Prabowo Subianto succeeded in passing the regional elections (Pilkada) law, which will scrap direct election of regional leaders, in the early hours of Friday morning.

Under the new law, governors, mayors and regents will be selected by the DPRDs.

The sell-off of Indonesian assets dragged the Jakarta Composite Index (JCI) of shares down by 1.3 percent, the steepest one-day decline in four months, to close at 5,132 on Friday. The rupiah depreciated by 60 basis points to hit 12,007 per dollar, according to the Jakarta Interbank Spot Dollar Rate (JISDOR).

The rupiah depreciation might be 'temporary' as it was driven by non-fundamental factors such as political sentiment, Bank Indonesia (BI) spokesman Peter Jacobs said on Friday.

However, the head of equity research and strategy with state-run Mandiri Sekuritas, John D. Rachmat, denied it was simply political sentiment. 'This is a demonstration of what the Red-and-White Coalition can do to frustrate Jokowi's programs,' he said via email.

'Rather than a stream of positive reforms, we may get instead a stream of corruption-friendly new rules,' warned Rachmat, who forecast the JCI to weaken to 4,800 by the end of October due to a combination of domestic and external factors.

The domestic bond market also saw a sell-off on Friday. The yield on the government's benchmark 10-year bonds climbed six basis points to 8.22 percent, prices from the Inter Dealer Market Association show, as quoted by Bloomberg.

The failure of the PDI-P to secure enough support for retaining direct elections would be a preview of the challenges facing Jokowi going forward, analysts from Maybank wrote in a note distributed to clients.

In the next House, the coalition supporting Jokowi, which comprises the PDI-P, the National Awakening Party (PKB), the National Democratic Party NasDem Party (Hanura), will only make up 36 percent of total the seats, with the rest controlled by Prabowo's coalition.

Mirza S. Baig, the head of Asian rates and strategy with BNP Paribas in Singapore, argued that the passage of the bill 'represents a successful challenge to the PDI-P coalition and puts some of the expected reforms in doubt.'

He noted that the latest sharp market reaction was a combination of the renewed risks in both the domestic and external market environment, especially as it occurred when tightening of US monetary policy was imminent and China's economic momentum continued to decline.

'Bad news is bad news again; we are expecting global investor appetite to worsen further,' Mirza stated in an email interview.

'Volatility is coming back.'