(Jan 30): One of the biggest selloffs in Indonesia since the Asian Financial Crisis in 1998 is deepening worries among investors about where President Prabowo Subianto is taking Southeast Asia’s biggest economy.
A warning by MSCI Inc this week about Indonesia’s investability triggered the two-day rout. While the benchmark Jakarta Composite Index pared losses Thursday after regulators pledged measures to address the index compiler’s concerns, fund managers including Aberdeen Investments and Valverde Investment Partners are expecting things to get worse for the nation’s equities.
Underpinning the concerns are moves by the former general — a protege of ousted dictator Suharto — to shoehorn the president’s nephew into the top leadership of the central bank not long after the removal of Sri Mulyani Indrawati, an internationally respected economist, as finance minister. The government earlier this month reported its budget shortfall surged to its highest in more than two decades, apart from the pandemic years, as Prabowo pursued his social spending plans.
The Indonesian leader is also expanding the state’s role in the economy through Danantara, a sovereign wealth fund he formed last year that reports directly to him. Some US$5 billion (RM19.69 billion) in annual dividends from Indonesia’s state enterprises, which would otherwise flow into the national budget, have been funnelled into Danantara already. Another state firm — led largely by retired military officers — is taking charge of palm oil plantations seized by regulators over the past year on alleged infractions or misuses, covering an area roughly the size of Switzerland.
The MSCI move and fallout “accelerates the decision to exit the market for anyone who was on the fence”, said Xin-Yao Ng, a fund manager at Aberdeen. “We’ve already been concerned about their policy developments, which are excessively socialist without concrete benefits to consumption growth, while the risk for private sector has spiked.”
Prabowo, who travels often but was in Jakarta this week, has remained silent amid the market swings, letting his ministers lead talks with regulators to fast-track reforms, which would meet MSCI’s requirements to maintain its weightings in key indices and remain classified as an emerging market. A downgrade to “frontier” status by MSCI would be the first since Pakistan lost its emerging-market status in 2021.
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Indonesia’s bonds are trading about 35 basis points over emerging markets peers, just below similar premiums that emerged in Brazil and Colombia amid similar policymaking concerns, Jason Tuvey, deputy chief emerging markets economist at Capital Economics, said in a note this week, Indonesia’s cost to borrow money indicates “quite a lot of bad news is now priced in”, he said.
The rupiah, which touched record lows last week, has dropped 0.6% against the greenback since Thursday, on track for the biggest two-day decline since September.
To be sure, Indonesia can’t easily be set aside by emerging-market investors. It boasts the world’s fourth largest population, steady consumption, high-demand commodities like palm oil and nickel and a fast-growing electric-vehicle manufacturing ecosystem.
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While the stock market rout has been “unsettling”, the reforms initiated in response would improve investability in Indonesia’s equity market, said Daniel Lau, an Asean fund manager at Eastspring Investments in Singapore. He added that they are using the selloff as a chance to buy up shares of high-quality local firms.
“As long-term investors, some turbulence is not uncommon,” he said. “And fundamentals remain our north star.”
Prabowo has pitched his moves as necessary for Indonesia’s economy to grow at around 8% a year, well above the 5% average of the past two decades. He sees the sovereign wealth fund and ramped-up social spending as necessary to improve the living standards of its nearly 300 million people and take back national wealth he says has been squandered by elites and resource firms.
International investors have also been exposed to that resource grab. During the chaos of Wednesday’s stock selloff, the government announced a new firm under Danantara will take over a major gold mine operated by a unit of conglomerate PT Astra International, which is controlled through a subsidiary by multinational Jardine Matheson Holdings Ltd.
Homin Lee, senior macro strategist at Lombard Odier Singapore, said he’s cautious on Indonesia and favours the likes of South Korea, China, India and South Africa. Beyond the MSCI headwinds, he cited “eroding policy discipline” and a “lack of obvious next catalysts” for earnings.
For now, it seems unlikely that Prabowo will pivot. Indonesia lawmakers are considering ditching a budget deficit cap of 3% of gross domestic product put in place after the 1998 crisis, one of the pillars of fiscal responsibility that attracted investors. Prabowo’s spending plans are already bumping up against that limit, which is below many emerging markets.
The nation’s parliament, which is aligned with Prabowo, is also looking to expand the central bank’s mandate to support the economy. Prabowo has already appeared to push Bank Indonesia in the direction, roping it into shouldering part of the debt costs of his projects — a risky practice known as “burden sharing”.
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The Indonesian Financial Services Authority responded to MSCI’s concerns over market transparency Thursday, saying that it would implement from next month a rule that requires companies to have a minimum 15% free float from the current 7.5%. It also said Danantara may actively participate in the market to help boost stock liquidity through its subsidiaries.
“This is a wake-up call,” said David Sumual, chief economist at PT Bank Central Asia, one of Indonesia’s largest privately owned banks. “This is the moment for us to carry out reforms, so that we can gain international recognition and align with global benchmarks.”
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