Political uncertainty to pressure Indonesia's stock market

JAKARTA, July 10 Wed Jul 9, 2014 5:34pm EDT

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JAKARTA, July 10 (Reuters) - Indonesia's stock market is expected to come under pressure on Thursday after both presidential candidates claimed victory in a tightly fought election.

Jakarta Governor Joko "Jokowi" Widodo and ex-general Prabowo Subianto on Wednesday both declared themselves the winner based on contradictory quick count results in the closest election ever in Southeast Asia's largest economy.

That suggests a winner will unlikely be known until official results are announced in two weeks. The quick counts are conducted by private agencies which collate actual vote tallies from each district.

"With both camps declaring victory, the market could still be held hostage by politics at least through July 22," said Harry Su, head of research at Bahana Securities in Jakarta.

The rupiah and bond markets rose in offshore trade on Wednesday, a public holiday in Indonesia, after Jokowi declared victory. Prabowo countered soon after saying he had won.

The stock market, up 17.6 percent so far this year, will have its first chance to respond to the political uncertainty on Thursday. The market closed on Tuesday at its highest level since mid-May.

"Given the scale of the economic challenge confronting Indonesia's new president, and the country's domestic and external vulnerabilities, a divided nation is the worst possible outcome as far as the politics of economic reform are concerned," said Nicholas Spiro, managing director of Spiro Sovereign Strategy in an e-mail.

Foreign investors who own almost 80 percent of the free floating Indonesian stock market have been buying, although their investments have slowed to a trickle in the past month.

Data from the Indonesia Stock Exchange showed that by Tuesday, foreign investors had invested a net 46.5 trillion rupiah ($4 billion) so far this year.

The rupiah has risen 3 percent against the dollar since last week, and is now around 11,600 per dollar. Local bonds too have rallied, despite the threat of an imminent rise in administered fuel prices and therefore in policy rates.

Some investors said Indonesia remained an attractive long-term investment despite the uncertainty.

Winston Sual, president director of Panin Asset Management, who has about 15 trillion rupiah ($1.29 billion) under management, said he was not overly concerned by the election dispute and would increase investment in the stock market.

Ari Pitoyo, chief investment officer at Eastspring Investment Indonesia, said his firm was ready to enter the market irrespective of who won.

"We believe all business activities will resume and some volatility tends to give us a chance to invest," Pitoyo said.

Analysts at local brokerage Trimegah Securities said local institutional investors were holding about $2.9 billion in cash, after selling out of stocks when the presidential race changed from being in Jokowi's favour to a close contest. These investors were preparing to re-enter the market, Trimegah said.

Indonesia is heavily dependent on foreign portfolio flows to finance its huge current account deficit, and has had several bouts of capital outflows triggered by double-digit inflationary spikes and currency volatility.

The bond market is among the emerging world's highest yielding, with foreigners owning more than 35 percent of outstanding bonds. That money is at risk should policy rates climb too fast, or should a rise in U.S. yields cause portfolio outflows from emerging markets. ($1 = 11,620 rupiah) (Editing by Randy Fabi and Vidya Ranganathan)

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