[JAKARTA] A sell-off in Indonesian stocks and bonds continued on Monday (Sep 1), weighed by growing concerns over political stability in South-east Asia’s biggest economy.
The country’s equity benchmark fell as much as 3.6 per cent, the most in nearly five months, before trimming losses to close down about 1.5 per cent, with financial shares including Bank Rakyat Indonesia among the biggest drags. The move came after protests heightened over the weekend in response to rising living costs and inequality.
Stress also was evident in the bond market, with yields on the nation’s benchmark 10-year government paper up seven basis points to 6.4 per cent, the highest in almost three weeks. The rupiah was steady as the central bank continued its intervention to keep the currency stable.
The rout in Indonesian stocks and debt that started Friday marks a reversal of investor mood, when some global funds had just started rotating back into South-east Asian assets given lower valuations and potential monetary easing. Political turbulence, which is also plaguing Thailand at the moment, heightens the risk of foreign capital outflows that have accelerated in recent days.
Indonesia’s “political risk will rise, and so will the equity risk premium,” said John Foo, founder of Valverde Investment Partners in Singapore. “We are underweight on Indonesia as the valuations do not reflect the underlying issues in the economy.”
President Prabowo Subianto cancelled a trip to China following the deadly unrest as demonstrators targeted the homes of Indonesia’s finance minister and several lawmakers. On Sunday, Prabowo announced parliament will remove hefty lawmaker perks that had been a source of ire for many protesters.
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Outrage
Protests in Indonesia were sparked last week by outrage over lawmakers’ housing allowances- nearly 10 times the monthly minimum wage in Jakarta – and fuelled by tax hikes, mass layoffs, and inflation that have disproportionately hit lower-income Indonesians.
Banks were among the biggest drags on the stock benchmark, with Bank Rakyat, Bank Central Asia, and Bank Mandiri Persero all down more than 4 per cent intraday.
Any capital outflows would first hit the financial sector, Prasetya Gunadi, head of equity research at Samuel Sekuritas Indonesia, wrote in a note. “Banks remain the most exposed, given their large index weight and potential liquidity stress if political instability triggers capital withdrawals.”
Indonesia’s stock market attracted a net US$676 million from foreign investors in August, according to data compiled by Bloomberg. Its equity benchmark is up 8 per cent this year, having reached a record high before the unrest erupted.
On the currency front, the rupiah is one of the weaker performers in Asia this year, down over 2 per cent against the greenback.
“Indonesian stocks are poised for more declines with political risks clouding the outlook. The recent escalation weakens the outlook and raises the equity risk premium,” said Mary Nicola, MLIV macro strategist. “That will keep Indonesian assets under pressure, and likely unwind the inflows seen in August.”
BNY downgraded its outlook on the rupiah to neutral from positive on Monday, because of the near-term political factors, according to Wee Khoon Chong, a senior strategist in Hong Kong.
“While we think such unrest is likely to be short-lived, investors will no doubt de-risk or increase hedges on their Indonesia portfolios,” he said. “An acknowledgement of discontent and positive social and market reforms towards transparency and equity might restore confidence.”
Thai woes
Political turmoil is also rocking Thailand, where politicians are jockeying to lead the next government after the disqualification of Prime Minister Paetongtarn Shinawatra.
Thailand has struggled for decades to overcome political infighting, contributing to slower economic growth compared with regional rivals. Anutin Charnvirakul, a conservative politician, claimed late on Friday to have sufficient support from lawmakers to become prime minister, saying the nation must not “come to a standstill.”
Valverde’s Foo was comparatively sanguine about Thailand, citing cheap valuations and the hope that a new prime minister will stimulate the economy. “The market is ready for a change in PM in Thailand,” he said.
For BNY’s Chong, the baht is likely to remain in its current trading range despite the rising political uncertainty, thanks in part to the downtrend in the US dollar.
Foreign investors have pulled US$670 million out of Thai stocks so far this year. The Thai equities benchmark has dropped about 12 per cent since 2025 began, with the baht up over 5 per cent against the US dollar.
Long-term outlook
Nirgunan Tiruchelvam, an analyst at Aletheia Capital in Singapore, argued the current turbulence in both nations doesn’t “alter the long-term outlook” given the prospect of looser monetary policy and the valuations the bourses offer.
Prabowo has prioritised economic expansion and pursued a populist agenda since coming to power last year, including a massive free meals programme, raising some concerns about Indonesia’s fiscal outlook. Another signature initiative is a newly established sovereign wealth fund, Danantara, which oversees nearly 900 state firms and has reported US$1 trillion in assets under management.
The president’s policies have yet to alleviate the economic struggles faced by the lower-income population in Indonesia, said Xin-Yao Ng, an investment director at Aberdeen Investments.
“I have remained concerned about the economic trajectory and am waiting to see what Danantara can achieve in this regard,” Ng said. BLOOMBERG
