After Unofficial Jokowi Win, Euphoria on Indonesian Markets Starts to Wane

According to the Bloomberg Dollar Index, the Indonesian rupiah rate performed more stably today, having depreciating only 0.12 percent to IDR 11,588 per US dollar by 13:00 pm local Jakarta time. However, Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.67 percent to IDR 11,627 against the US dollar:

| Source: Bank Indonesia

It is important to emphasize that the Jokowi victory in the 2014 Indonesian presidential election is still an unofficial victory as it is based on various quick count results only. The official result will be announced by the Indonesian General Elections Commission (KPU) on 22 July 2014. However, the majority of the quick count results have proven track records of accurate outcomes and therefore the market did not want to wait until the official result. According to the reliable quick counts, market-favorite and reform-minded Jokowi beat controversial candidate Prabowo Subianto by a margin of about five percentage points (roughly six million voters) but confusion emerged on Wednesday afternoon when both camps claimed a victory based on different quick counts. However, the quick counts that support a Subianto win are controversial, possibly influenced by ‘money politics’. But we would also like to point out that the system of rule of law in Indonesia is a relatively fragile one (compared to some western countries), susceptible to nepotism, corruption and money politics, and therefore we expect that Subianto will still try as hard as possible to sabotage the official outcome. For example, by trying to influence the KPU’s official result or disputing the official result in a court case handled by Indonesia’s Constitutional Court (moreover Indonesia’s judicial system is not free from corruption as could be seen in the recent Akil Mochtar-case). Or public disorder can be triggered by pro-Subianto protests (in fact, paying a mob to protest is not uncommon to Indonesia). However, these are ‘worst-case scenarios’. Jokowi also has several influential people on his side, both in the political arena and media, and therefore there may be enough checks and balances, if needed at all, to achieve a corruption-free final election result.

Seeing today’s performance on Indonesian markets, market participants’ euphoria seems to have waned. Instead, they are now looking again to the country’s actual macroeconomic condition and corporate performance of the listed companies. The reality is that Indonesia’s economy has been slowing since 2011, has to cope with a large trade deficit (and current account deficit), and recently had to raise the budget deficit from 1.69 percent of gross domestic product (GDP) to 2.4 percent of GDP due to large fuel subsidies that strain government finances (and which are partly to blame for the wide current account deficit). The Jakarta Composite Index climbed to 5,098.11 points on Thursday (11/07) although the ‘normal’ level, given the current macroeconomic conditions, is possibly around 4,800 points. The current level of the Jakarta Composite Index is actually the level that is expected at the year-end, provided that the rupiah exchange rate will not depreciate significantly (thus eroding corporate earnings and the real value of Indonesian stocks).

Moreover, Indonesian markets can be influenced by negative market sentiments imported from abroad. This week, indices on Wall Street have declined due to slowing corporate earnings of listed companies. Moreover, Portugal is experiencing a debt crisis and Israeli aggression in Palestine makes global investors nervous. In this context, profit taking is highly likely, especially because the Jakarta Composite Index had already reached an overbought level.

Meanwhile, yesterday, the central bank of Indonesia (Bank Indonesia) decided to maintain its interest rate environment as it expects the current interest rates sufficient to push inflation further down to its year-end target range of between 3.5 and 5.5 percent and support a narrowing of the country’s current account deficit. In June 2014, inflation had eased to 6.70 percent (year-on-year) and the May trade balance recorded a USD $69.9 million surplus (after a disappointing USD $1.96 billion deficit in the previous month). Bank Indonesia kept its benchmark interest rate (BI rate) at 7.50 percent. This had already been expected by the market.

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