(Bloomberg) -- It wasn’t supposed to unfold this way. Just over a year ago, optimism about Indonesia was running high, with investors expecting Prabowo Subianto to extend former President Joko Widodo’s pro-business policies.
Instead, they are now grappling with shifting priorities as Prabowo’s costly welfare plans strain the nation’s finances and threaten to sap economic activity. These concerns contributed to a rout in the nation’s stocks on Tuesday, sparking the first trading halt since the pandemic and prompting the central bank to defend the rupiah.
“People were expecting the new president to continue on with that agenda, and instead they have seen a transition toward a new priority,” said Thea Jamison, managing director at Change Global Investment LLC. “And that priority is still yet to be truly defined and articulated.”
The turmoil has added to doubts about the investability of Southeast Asia’s largest equities market, which is down 20% from a September peak. Tuesday’s action was also fueled by speculation over veteran Finance Minister Sri Mulyani Indrawati’s potential resignation.
While Indrawati vehemently dispelled the rumors, the speculation came at a precarious moment. There are concerns about the health of Indonesia’s public finances, including an early-year budget deficit and a 20% drop in state revenues. The outlook remains uncertain amid unclear budget allocation plans and a lack of new revenue-generating measures.
Investors are now being forced to weigh up whether the selloff was a blip or a sign of things to come.
The benchmark Jakarta Composite Index ended Wednesday’s session 1.4% higher. Investors also got a bit of good news from the country’s securities regulator, which eased rules on stock buybacks for the next six months. Meanwhile, the central bank kept its key interest rate unchanged for a second straight month to safeguard the rupiah.
But Indonesia’s stock market remains one of the worst performing in the world, and investors still have troubling questions about the approach of the current government.
“Foreign investors are clearly rattled by Prabowo’s troubling signals on budget reallocation and the Finance Ministry’s ability to maintain the overall fiscal discipline,” said Homin Lee, senior macro strategist at Lombard Odier Ltd.
Prabowo has sought to divert funds into his priority projects, while cutting back on expenditure elsewhere. Adding to the investor unease is the newly launched sovereign wealth fund Danantara, which has a direct reporting line to the president. The fund’s control over companies making up more than a fifth of the JCI Index has stoked fears of political interference and transparency risks.
Overseas investors have already pulled almost $1.8 billion from Indonesian stocks on a net basis this year amid broader pressures from a stronger dollar and rising trade tensions. The outflows have contributed to the rupiah falling more than 2% this year.
The anxiety has also spread to the bond market. Spreads of dollar bonds issued by Indonesian companies hit their widest level in six months at Tuesday’s close. Indonesian bank PT Bank Tabungan Negara pulled a planned dollar bond, citing market volatility, according to people familiar with the matter.
Amid the turmoil, Goldman Sachs Group Inc. has downgraded the nation’s equities to market weight from overweight, citing weaker earnings, policy uncertainties, risks to state-owned banks’ profitability as well as a wider fiscal deficit.
“Indonesia has had its own challenges with the new government coming in and the market is looking for direction,” said Chetan Sehgal, a portfolio manager at Franklin Templeton Investments, which is underweight the country’s stocks. “When you see change, there’s apprehension and it’s only for the government to rebuild its credibility.”
--With assistance from Claire Jiao.
(Updates with closing prices, BI’s decision. An earlier version corrected a reference to foreign investors’ selling of government bonds.)
