The Wall Street Journals (July 9, 2009)
JAKARTA (Dow Jones)–Indonesian markets were only mildly higher Thursday even as initial vote counts indicated popular incumbent president Susilo Bambang Yudhoyono had breezed to a second term in office, as investors had largely anticipated such an outcome.
Analysts though generally agreed a stronger mandate for Yudhoyono would allow him greater leeway in the legislature to proceed with economic and other reforms, and local assets would gain more going forward.
“Yudhoyono’s next government is likely to have broader parliamentary support, be more secular and technocratic-based,” said analysts at Standard Chartered.
The main stock index was a little choppy, ending 0.03% higher at 2083.974, off a high of 2114.71 but also off a low of 2060.70. Share traders said the index is likely to trade in a 2060-2150 range Friday.
The stock market had already risen 3.4% since the start of July, partly on election-related hopes, and 9.3% since the start of June, with the rupiah one of the best performing Asian currencies in recent months.
In part, the subdued reaction in stock markets was put down to the global declines in commodity and energy prices, which weighed on those sectors across Asia.
Palm oil company Astra Agro Lestari fell 2.0% and gas company Perusahaan Gas Negara 1.5%. State lender Bank Rakyat and carmaker Astra International both added 9.2% on expectations of solid first-half earnings as consumer sentiment has picked up.
“Selling in commodity-related stocks on lower oil prices offset earlier gains,” said Rifki Isnaini Hassan, a fund manager at Andalan Artha Advisindo.
Some were waiting on official results from the election, which should come at the end of July. But a number of exit polls that have proved reliable in the past showed Yudhoyono had handily surpassed the 50% threshold needed to avoid a second round of voting in September.
Even so, analysts said the near-term upside for Indonesian assets was limited.
“The jump would probably be less than what we saw after the Indian elections. In Indonesia the result is more in line with the market expectations,” analysts at HSBC said.
The rupiah gained sharply against the U.S. dollar. The U.S. dollar closed at IDR10,155 from IDR10,265 on Tuesday, when it last traded. Currency dealers said the dollar may trade in a lower IDR10,100-IDR10,150 range Friday and will likely head toward the IDR10,000 support next week.
Traders put support for the U.S. dollar around IDR10,190 and noted that Asian currencies generally were lower in Asia Thursday.
Still, analysts at Citigroup said the dollar could test IDR10,000 before too long. And Standard Chartered kept an overweight rating on the rupiah, tipping the dollar at IDR9,500 by end-2009.
In the local government bond market the yield on the FR44 series 15-year fixed rate benchmark bond fell to 11.40% from 11.61% on Tuesday, while the FR36 four-year yield fell to 10.37% from 10.68%. The FR30 three-year bond yielded 9.48%, from 9.83% on Tuesday.
While most buying interest was clustered in the short-end of the curve, the decline in yields in the belly of the curve was being taken as a positive sign for longer-term risk appetite for the assets of the emerging market nation.
The country’s five-year credit default swaps were around 20-25 basis points narrower, at 300 basis points.
Analysts said for markets the next cues would come from Yudhoyono’s formation of a new cabinet and how quickly he moved to push through less successful reforms from his first term, like infrastructure development.
Prakriti Sofat, an economist with HSBC, said greater support in parliament would help Yudhoyono be more selective about appointments to key cabinet posts and that, since Indonesian presidents are limited to two terms, he may be able to act more freely without having to worry about being reelected.
A decisive election win “will translate into more time and leverage for him to select capable ministers. By winning in one round, he avoids the need to trade important cabinet positions to the patronage-driven Golkar party in order to forestall an alliance against him in a second round of elections. This gives him a freer hand to choose ministers based on ability rather than political influence. He has also won more time to deliberate on his cabinet choices, rather than having to hit the campaign trail again for another two months,” said Eurasia Group analyst David Kiu.
Meanwhile presidential challenger Jusuf Kalla, Yudhoyono’s vice president in his first term, could be ousted as leader of the powerful Golkar party following his election defeat.
That’s likely to pave the way for a Golkar coalition with Yudhoyono’s Democrat Party, creating a solid parliamentary majority of 75.1% of seats, smoothing the way for reforms on taxation, governance and judicial reform, Macquarie Securities said in a report.
Bank Danamon economist Helmi Arman said key challenges for the new government will be successful infrastructure reform and overseeing central bank efforts to contain volatility in the rupiah and local bond markets.
Others added Yudhoyono would likely be less reliant on Islamist parties in parliament.
Markets were also watching ratings houses in the wake of the election. Aninda Mitra, a Moody’s vice president and sovereign analyst for Indonesia, Wednesday told Dow Jones Newswires the chance of an upgrade for Indonesia’s credit ratings in the near future was “quite strong.”
More broadly, the election results come amid a climate of optimism on the Indonesian economy, with indications domestic demand has held up fairly well, alongside foreign direct investment, even as the fiscal picture has deteriorated somewhat.
“Aside from progress on the political front, growth fundamentals remain solid. Indonesia is one of the least external-demand-dependent economies in the region,” said analysts at Goldman Sachs. They forecast gross domestic product to grow 4.2% this year and 5.2% in 2010 - at a time GDP in many other parts of the world is declining.
“In the longer term, Yudhoyono’s reelection is good news. Armed with a stronger mandate and with a high caliber economics team at his side (bolstered by former central bank governor Boediono as Vice President), the pace and quality of reforms should improve,” said DBS. Like many Indonesians, Boediono uses a single name.
Traders and economists were also waiting for clarification on who might become the new governor of the central bank, with indications Yudhoyono might favor Finance Minister Sri Mulyani Indrawati. Mulyani has been nominated as a candidate, and Yudhoyono will likely soon select one further nominee for the post, before presenting the candidates to parliament.
“We believe this is a credible choice - Sri Mulyani has proven to be a strong reformer,” said Goldman Sachs.
-By Reuben Carder, Dow Jones Newswires; 62 21 3983 1277; Reuben.Carder@dowjones.com (Edhi Pranasidhi and I Made Sentana contributed to this story
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