Indonesian markets could be in for a Jokowi rally

Market Updates , Fixed Income 4/16/2019 by Carl Vermassen
Reading time: 2 minute(s)
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Markets anticipate Indonesian president Joko Widodo to be re-elected on April 17. No wild market swings are expected, unless the victory proves to be larger than the 7%-win of 2014,  which would bolster Indonesian financial markets across the board: Indonesian local currency bonds could rally by 25 basis points while the Indonesian rupiah could surpass year-to-date highs of 13´900 against the US dollar due to investors unwinding their currency hedges.

17 April 2019 will be a massive democratic exercise in Indonesia. More than 240’000 candidates will present themselves to over 190 million voters for 20.000+ mandates. Five ballots must be cast not only for the offices of President and Vice President, but also for the Lower House (DPR), Regional Representative Council, and local provincial and municipal councils. Most attention goes to the legislative and the presidential elections.

The presidential election pits incumbent Indonesian President Joko Widodo, known as Jokowi, against former general Prabowo Subianto for a five-year term between 2019 and 2024. The election is a re-match of the 2014 presidential election, in which Jokowi defeated Prabowo.

In the legislative elections Prabowo and Jokowi's party will both do well, bringing even more focus to the bid for the presidency.

Latest polls give Jokowi a 18% lead with only 7% of voters remaining undecided.  While there is anecdotal evidence that Prabowo's campaign gained strong last-minute momentum in urban areas, the central scenario remains that Jokowi achieves a comfortable - but no landslide - victory.

A moderate Jokowi win is widely anticipated by markets in which case the reaction will be muted. Local bonds and FX could rally a bit but no big moves are expected. 

The situation could be different, should Jokowi be able to prevail over his opponent more decidedly than in 2014 when he won by a margin of 7%. A clear win would fuel expectations for strong markets resulting in a clear 25-basis point rally on local currency sovereigns and the Indonesian rupiah surpassing its year-to-date high of 13’900 against the US dollar. The main driver on the currency is a swift unwinding of hedges by market participants who appear to be more concerned with short-term wins and less so with the country’s long-term current account balance and the Bank of Indonesia intervening against excessive currency strength.

A narrow - say anything less than 3% - win makes the situation a lot trickier: Prabowo has indicated before that he will challenge the election outcome if the difference is too small. This means that some post-election violence cannot be excluded. 

If unexpectedly Prabowo would win outright, the reaction in markets will be clearly negative. Indonesian local currency bonds would be selling off aggressively which will probably push rates about 40 to 65 bp higher, due to international investors reducing their moderate overweight in the asset class. While FX would be weak as well, it is probably fair to expect an intervention by the Bank of Indonesia at around 14’500-14’600.