Over the past few days, the focus was on Portugal as the parent of the country’s largest bank delayed on a debt payment. However, despite all the concern, the euro barely moved against the U.S dollar. In contrast, it was the Indonesian rupiah (IDR) that was the most volatile during the past week. This is because of the ongoing presidential election taking place in Asia’s fifth largest economy.
There is a very close vote between the two very different candidates. Joko Widodo , known as Jokowi, represents the common person. Coming from a middle-class background as a furniture dealer, he later rose to become the governor of Jakarta. The other candidate, Prabowo Subianto, comes from an elite class. Born as the son of a former cabinet minister and once married to ex-President Suharto’s daughter, he was a general during the Suharto era. Currently, both candidates continue to declare victory, but preliminary results show that Jokowi is leading by about 5 percent, reflecting the fact that half of Indonesia’s population is younger than 29.
The financial market has also caught on to their differences. Investors believe that a Jokowi victory would be more market-friendly, portraying a more Western-style government; while a Prabowo win would mean more debt and protectionism. Already assuming Jokowi is winning, the Indonesian rupiah, sovereign bonds and the Jakarta Index have all strengthened. The Jakarta Index is trading at a 12-month high – a contrast to what is happening in the Eurozone.
That being said, there are challenges. The new president will have to inherit an economy that has a bumpy road ahead. Its first quarter GDP rose only 5.2 percent, the slowest in five years, and its biggest challenge would be to plug its trade deficit. The final election tally comes out around July 21, but if the count is too close and is brought to court, it may drag on until late August.
My View: The current level of the IDR has already discounted a Jokowi victory. However, if Jokowi’s victory is only by a thin margin, the market may react, fearing that a lame-duck government will not be able to implement the necessary reforms that Indonesia needs to attract foreign capital.
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