Indonesia’s central bank, Bank Indonesia, has intervened in the currency and financial markets to stabilize the rupiah after a sharp decline this week. The move comes amidst increasing market volatility and investor concerns over recent political developments. The central bank’s new measures include revised buyback rules designed to lift market confidence.
According to regulatory sources, foreign investors sold $150 million in stocks on Tuesday, contributing to the downward pressure on the rupiah. Investor sentiment has also been affected by the military’s expanded role in state institutions, which has raised concerns over the country’s policy direction and political stability. Market analysts indicate that while the central bank’s intervention might provide temporary relief, the underlying political uncertainties and investor apprehensions regarding governmental policies need to be addressed to ensure long-term stability.
Instead, investors are now grappling with shifting priorities as President Prabowo Subianto’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. The turmoil has added to doubts about the investability of Southeast Asia’s largest equities market, which is down 20% from a September peak.
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.
Central bank’s intervention amid volatility
There are concerns about the health of Indonesia’s public finances, including an 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. Investors are now being forced to weigh up whether the selloff was a blip or a sign of things to come.
Overseas investors have already pulled almost $1.8 billion from Indonesian stocks on a net basis this year amid broader pressures from a stronger dollar and rising trade tensions. The outflows have contributed to the rupiah falling more than 2% this year. Amid the turmoil, Goldman Sachs Group Inc.
has downgraded the nation’s equities to market weight from overweight, citing weaker earnings, policy uncertainties, risks to state-owned banks’ profitability as well as a wider fiscal deficit. Indonesian stocks experienced a significant decline on Friday, falling by 4% amid growing concerns over the country’s economic stability. Analysts attribute the downturn to a combination of rising inflation rates, a weakening currency, and uncertainty about the government’s fiscal policies.
The Indonesian government has been working to implement measures to stabilize the economy, including interest rate hikes and interventions in the foreign exchange market. However, these efforts have yet to show significant results. For now, investors remain cautious, keeping a close watch on any further economic developments and government responses that could influence market stability in the coming weeks.
Image Credits: Photo by Killian Pham on Unsplash
