(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.
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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 benchmark Jakarta Composite Index was mixed in early trading Wednesday, as investors digested the Tuesday selloff. The gauge fell more than 1% at the open on Wednesday before quickly erasing losses to trade 0.3% higher.
The turmoil has added to doubts about the investability of Southeast Asia’s largest equities market, which is down 21% from a September peak and ranks among the world’s worst performers this year. 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 a 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.
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.
“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.
