Indonesian Rupiah Predicted To Trend Higher On Post-Election Growth And Rising Risk Appetite
Despite near-term election-related risks, the Indonesian Rupiah to US Dollar exchange rate remained firm over recent sessions amid sustained foreign inflows into both the Rupiah and Indonesian stock markets.

Thursday saw Credit Suisse Group AG upgrade the Indonesian stocks to market weight from underweight to average relative to the rest of its Asia allocation while noting the Rupiah remained cheap on a long-term basis, especially given expectations of rate cuts ahead.

Credit Suisse strategists wrote With the regions highest real bond yields, Indonesia has the best medium-term rate cut potential in Asia, in a note to clients.

Meanwhile Bank Indonesia executive director Nanang Hendarsah reaffirmed the banks objective to provide financial market stability via a stable currency.

Muted alongside the majority of Asian FX throughout 2018 amid the US Dollars, Fed-induced stranglehold on EMs, the Indonesian Rupiah to US Dollar has gained almost 7% since October 2018, when indications of a Fed hiking cycle pause first hit the newswires.

Commenting on recent months performance for the Asian currency, Nordea analyst Amy Yuan Zhuang summarised the factors imapcting the IDR. Zhuang wrote The IDR weakened sharply during 2018 due to risk-off sentiment. It prompted Bank of Indonesia (BI) to hike rates six times to defend the currency. The timely response has generally won BI credibility and improves the IDRs attractiveness to foreign capital. It is reflected by an increase in net equity inflows into Indonesia equities since late last year.

Recent weeks have seen the IDR trim gains following a February high with price action becoming more muted as investors await the outcome of next weeks elections.

Elections are due to take place next Wednesday (17th April) with the latest polls suggesting that while incumbent president Joko Widodos (Jokowi) coalition is expected to retain office, a victory for the populist government isnt a foregone conclusion, leaving investors side-lined ahead of the ballot.

Given a Jokowi victor has largely been priced in to the Indonesian Rupiahs current pricing, immediate IDR and Indonesian equity market reactions arent expected to be dramatic.

With a victory expected but far from guaranteed, some analysts predict that a shock victory for leading opposition candidate Probowi could see the Indonesian Rupiah weaken in the near-term while, barring a shock result, the IDR should see further appreciation should sentiment around the health of the global economy and trade continue to improve and expected post-election reforms boost growth and foreign investment appeal.

Samsung Asset Management

Fund manager, Alan Richardson expects the rally in Indonesian stocks to continue should Jokowi win another five-year term in office.

Richardson wrote that Indonesian stocks are expected to rise in the first half as Jokowi is likely to be re-elected, given that Foreign investors prefer stability under a moderate leader with proven track record.

A surprise victory for Prabowo is expected to have a negative impact on the IDR and Indonesian stocks. Stocks will drop 5% and rupiah will decline in the event of a shock Prabowo win, added Richardson.

MUFG Bank

Asean head of global market research at MUFG, Sook Mei Leong, expects the impact of the presidential elections to mainly effect Indonesian equities over the Rupiah. However, given markets are expecting a Jokowi win, a knee jerk reaction could see the Rupiah lower in the short term.

Despite pre-election opinion polls indicating Jokowi remains the favourite, Leong suggested a Prabowo-Sandiaga coalition could do better than polls suggest.

Morgan Stanley

Morgan Stanley analyst, Hans Redeker retains a bullish outlook on the Rupiah on the back of lower inflation. The analyst expects foreign inflows into sovereign bonds to continue while forecasting three post-election rate cuts from bank Indonesia as inflation pressure continues to ease and current account deficit narrows, which in turn will support rally in government bonds and attract more inflows, which will be positive for rupiah.

Nordea

Chief Asia analyst, Amy Yuan Zhuang, expects little market reaction should Jokowi take victory at next weeks election, A Jokowi-win is largely priced in the market, so no major immediate reactions are expected for the IDR nor Indonesian equities.

However, the general outlook remains bullish on the IDR with the market and foreign investors expected to favour a continuation of the same conditions, leading to continued inflows from foreign investment. A resolution to US-China trade is also expected to help the IDR.

Zhuang added If a trade deal between China and the US is reached, it will be positive for the IDR through metal prices, as Indonesia is a major metal exporter.

Zhuang cites a need for continued commitment to structural reforms in order for the Indonesian economy to realise its full potential.

Indonesia has the potential to become a huge manufacturing hub for the world. To achieve this, it needs to improve its transport infrastructure, which is lagging many of its Asian peers. It also needs to cut red tapes and improve transparency in business practices, wrote Zhuang.

ING

ING senior economist, Nicholas Mapa, also expects the Indonesian Rupiah to appreciate as the year progresses on accelerating growth and favourable risk-sentiment.

Mapa wrote With the currency stable and growth expected to receive a boost from the elections, Bank Indonesia has held off on adjusting monetary policy while vowing to help boost liquidity to offset the ill effects of its recent aggressive tightening cycle, adding If risk sentiment continues to favour emerging markets, we could see the IDR appreciating further as Governor Warjiyo still views the currency as undervalued with the possibility of a policy reversal from the central bank now gaining some steam.

Source : Exchangerates.org.uk

Apr 13, 2019

 
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