(May 19): Indonesian markets fell on Tuesday as speculation mounted that the government will centralise commodity exports to control capital flows and shore up a plunging currency. Palm oil futures rose.
The benchmark Jakarta Composite Index fell 3.5% on Tuesday — taking its year-to-date loss to more than 26% as the world’s worst equity performer — with energy and basic material stocks leading the decline. The currency slid 0.3% against the dollar to another record low, while palm oil futures in Malaysia reversed earlier losses to climb as much as 2.2%.
Traders attributed the slump to speculation about the formation of a special agency for strategic commodity exports including coal, crude palm oil and minerals. Such an organisation would raise concerns about greater state control over a critical industry but also potentially help bolster government finances amid a widening fiscal deficit.
The concerns are amplified by the outsized role of commodities in Indonesia’s economy. The country is a major exporter as well as the world’s largest palm oil producer, so any changes to export flows can impact currency stability as well as foreign-exchange reserves.
“The market is reacting negatively because investors are worried this could add another layer of state control and policy uncertainty for commodity exporters,” said Mohit Mirpuri, a partner at SGMC Capital Pte Ltd. “In my view, the broader direction is clear: the government is doing everything it can to defend the rupiah and keep export proceeds onshore.”
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Representatives of sovereign wealth fund Danantara Indonesia, the Trade Ministry and the Finance Ministry did not immediately respond to requests for comments.
The stock decline underscores mounting pressure on Indonesian authorities to stabilise markets amid high oil prices risks, with the rupiah weakening by nearly 6% this year. Investor sentiment has also been rattled by an upcoming MSCI Inc decision on a potential downgrade to frontier markets following the recent removal of several large companies from its indices.
Fitch Ratings and Moody’s Ratings have also cut their credit rating outlooks on worries about fiscal risks and policy uncertainty.
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Pruksa Iamthongthong, the head of Asia-Pacific equities at Aberdeen Investments, told Bloomberg TV earlier that rising risks warrant a cautious approach to local stocks despite cheap valuations.
“We have the currency pressure on Indonesia as we speak. We have also lower confidence within the economy as well, and I think the government is also going to manage through the current account deficit situation as well,” she said. “So, there are quite a few headwinds.”
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