Three Cheers for Jokowi

INDONESIA - Report 31 Mar 2014 by Cyrillus Harinowo and Maria Kartika Purisari

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Executive Summary

Optimism breeds optimism. That’s an apt analysis of events in Indonesia so far this year. Good news in January generated further optimism, which ultimately strengthened the currency. At this writing, the rupiah has strengthened to about Rp. 11,400, from Rp. 12,300 earlier in the year, even though the trade balance, among the currency-bolstering factors, dipped back into deficit.

Powerfully positive capital markets sentiment underscored the optimism. The Indonesian stock market index has risen significantly this year, from 4,261 at the end of 2013, to 4,700 by mid-March 2014. We expect the index to rise to about 4,800 by month’s end.

It was amid such a welcoming atmosphere that the PDIP’s presidential candidate was finally declared. Joko Widodo, better known as Jokowi, was always the most popular pre-candidate in the various presidential polls – sometimes by a wide margin – though he’d yet to be nominated. The announcement of his candidacy gave a major boost to the capital and currency markets – stocks jumped to nearly 4,900 on the news, and the rupiah strengthened significantly. Although both markets corrected afterward, the Jokowi Effect lingered.

The positive market sentiment drew heavy capital flows back into Indonesia: more than $3 billion was invested in the stock and bond markets. Those inflows bolstered Indonesia’s foreign exchange reserves at the Central Bank. FX reserves were at $102.7 billion by the end of February, a rise of about $2 billion in within the month.

And then the trade balance fell into deficit. One event that had been expected was a plunge in mineral ore exports, where the shortfall was larger than the trade deficit. But prices of other commodities, such as coal, palm oil and rubber, also plunged. We can’t rule out the possibility that these falls were seasonal in nature (except in the case of mineral ores) so that March stats will show a rebound. In any case, exports dropped by $2.5 billion, to $14.48 billion, while imports fell by$500 million, leaving a $440 million deficit.
But the inflation numbers were good. February m/m inflation was 0.26%, pushing y/y inflation down further, to 7.75% from 8.22% in January. Given these data, the Central Bank felt confident about the stability of the economy and kept its benchmark interest rate unchanged, at 7.50%.