Indonesia’s equity benchmark slid 1.5% on Friday, the biggest decline in the world among national gauges tracked by Bloomberg, while its central bank signaled it was stabilizing the rupiah. Thailand’s 1.1% equity market retreat the same day also placed it among the most notable laggards, while the baht slipped.
President Prabowo Subianto cancelled a trip to China following the deadly unrest over rising living costs and inequality, as demonstrators targeted the homes of Indonesia’s finance minister and several lawmakers. In Thailand, politicians are jockeying to lead the next government after the disqualification of Prime Minister Paetongtarn Shinawatra.
The headwinds flared up just as lower valuations and potential interest-rate cuts raised the prospect of a rotation to Southeast Asia by some global funds. Political turbulence raises the risk of foreign investor outflows and pressure on local currencies.
‘Risk premium’
Indonesia’s “political risk will rise, and so will the equity risk premium,” said John Foo, founder of Valverde Investment Partners Pte in Singapore. “We are underweight on Indonesia as the valuations do not reflect the underlying issues in the economy.”
Protests there were sparked 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. On Sunday, Prabowo announced parliament will remove the hefty lawmaker perks.
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 toward transparency and equity might restore confidence.”
Meanwhile, 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 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.
Indonesia’s stock market attracted a net US$676 million from foreign investors in August, according to data compiled by Bloomberg. In contrast, they pulled US$670 million out of Thailand. So far this year, Thai stocks have dropped about 10% while the Indonesian equity market is up roughly 11%, achieving a record high before the unrest erupted.
On the currency front, the Indonesian rupiah is one of the weaker performers in Asia this year, down over 2% against the greenback, while the Thai baht has strengthened more than 5%.
“BI intervention may limit the extent of rupiah depreciation, but the risk of further foreign outflows remains if the unrest continues,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group.
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.