Indonesia Election Triggers Bond Funds’ Fears of Wider Deficit
Indonesia’s upcoming presidential election is causing concerns among bondholders as they fear a relaxation of fiscal discipline. The election, scheduled for February 14th, could undermine the fiscal discipline that contributed to a 10% gain in Indonesian bonds last year. Several asset management firms, including T. Rowe Price and Pictet Asset Management, are adjusting their holdings of Indonesian securities due to the uncertainties surrounding the election.
The outcome of the election carries significant implications for the country. Foreign inflows have played a crucial role in reducing Indonesia’s budget deficit to a 12-year low. These inflows are also instrumental in the nation’s goal of becoming a global battery manufacturing hub. The continued influx of overseas investment is essential for Indonesia to maintain its competitiveness against other high-yield countries like India, which has been gaining favor among investors.
Some market watchers are predicting a shift towards a more expansionary fiscal approach following the election. Leonard Kwan, a portfolio manager at T. Rowe Price, suggests that the previous government may not have fully capitalized on Indonesia’s growth potential and that the new administration may take a more proactive stance.
Indonesia witnessed significant foreign investment in 2023, with global funds acquiring over $5 billion of sovereign securities. This marked the highest annual inflow since 2019 and reflected the nation’s improved fiscal metrics. The government achieved its target of reducing the fiscal deficit to below 3% one year ahead of schedule, and the country has consistently maintained a trade surplus since May 2020.
President Joko Widodo’s tenure has been defined by reforms aimed at eliminating corruption and improving regulations. These efforts have boosted investor confidence and propelled the Indonesian rupiah to outperform its Asian counterparts with a 1% gain last year.
However, concerns persist that the positive trajectory might not continue. Jon Harrison, managing director for emerging-market macro strategy at GlobalData TS Lombard, highlighted the uncertainty surrounding the next administration’s commitment to economic openness and regulatory improvement. The possibility of populist policies and a looser fiscal policy following the election raises further concerns.
The two leading candidates, Prabowo Subianto and Anies Baswedan, have varying economic visions for the country. Prabowo has campaigned for increased debt levels, while Baswedan aims to review previous industrial policies and reduce reliance on Chinese investment. A runoff election in June could result in even more populist programs and a looser fiscal policy.
Some investors remain optimistic about Indonesia’s prospects. M&G Investments, for example, is increasing its exposure to Indonesian equities and favoring sectors such as consumer, finance, and commodities. They believe that the incoming administration will continue the economic trends established over the past decade.
Nevertheless, the market is pricing in some risk as the election draws closer. The 10-year government bond yield has increased by 12 basis points since the beginning of the year, reaching approximately 6.60%.
As investors closely scrutinize the candidates’ policies, the possibility of short-term volatility in the local-currency bond market increases. Experts recommend exercising caution due to elections’ inherent uncertainty and the absence of a significant risk premium.
In conclusion, Indonesia’s upcoming election has triggered concerns among bond funds regarding the potential widening of the fiscal deficit. The election outcome will significantly impact the country’s fiscal discipline, foreign investment, and future economic trajectory. While some investors remain optimistic about Indonesia’s prospects, others are adjusting their portfolios to mitigate risks associated with the election. As the election approaches, market volatility is likely to persist, requiring investors to remain vigilant in assessing the implications for their portfolios.
