Rupiah rises on Jokowi effect

The nomination of Jakarta Governor Joko “Jokowi” Widodo as a presidential candidate is expected to lure foreign investors, boosting the rupiah following sustained improvement in Indonesia’s macroeconomic data, analysts say.

The rupiah, which has appreciated by 6.7 percent year-to-date, has become the best performer among emerging markets, overturning a 26 percent loss last year.

The currency was traded at 11,421 per US dollar on Friday, according to the Jakarta Interbank Spot Dollar Rate’s (JISDOR) latest data.

A recent Bloomberg survey deemed the rupiah’s strengthening as excessive, predicting it would weaken to 12,200 per dollar by year’s end. However, some analysts believe Jokowi’s nomination might turn the tables.

UK-based Standard Chartered changed its rupiah year-end forecast to 10,900 per dollar last week, from 11,400 previously. France-based Société Générale predicted the rupiah would further strengthen to 11,000 against the greenback by the end of this year, while privately-owned Bank Danamon said the currency would hit 11,058.

“The latest improvement in Indonesia’s economic fundamentals supports our new forecast,” said Standard Chartered economist Eric Sugandi.

“The official announcement of Jokowi as a presidential candidate also means that [Indonesia] has less political uncertainty, providing short-term support to the rupiah.”

The Indonesian Democratic Party of Struggle (PDI-P) said last week that it would nominate media darling Jokowi as its presidential candidate, ending months of uncertainty as to who the opposition party would nominate to compete for the top job.

Jokowi is popular with foreign investors as many of his policies are seen as being both bold and business-friendly.

The 52-year-old also has a presence on the international stage having been invited to speak at the World Economic Forum in Davos, Switzerland, in January. He declined the invitation, however, due to his workload as Jakarta governor.

On Friday, the Jakarta Composite Index (JCI) posted its strongest advance in six months following news of his presidential nomination.

“The rupiah could even see further rallies should Jokowi win the presidency, though the gains will be limited as they may be priced-in by the market,” Eric predicted.

With the world’s third-largest democracy having a history of peaceful elections, stronger foreign inflows are likely to further support the rupiah this year.

In the last election year of 2009, the rupiah appreciated 10 percent to 8,453 per dollar by the end of the year, from 9,461 earlier in January, according to data from state-run lender Bank Mandiri.

“The assumption that the new government may be market-friendly will draw quite strong foreign inflows, leading to a [rupiah] appreciation,” said Mandiri economist Andry Asmoro, who forecast the rupiah to stabilize at 11,400 by the end of this year. “Of the foreign investors that I have met, most expect Jokowi to become president,” he added.

Before Jokowi’s nomination, global fund managers had already rushed to buy Indonesian assets after the latest data showed that the country’s current-account deficit — the major worry among foreign investors last year — halved to 2 percent of the gross domestic product (GDP) in the fourth quarter of last year, compared to 3.8 percent in the previous quarter.

Inflation fell to an eight-month low of 7.75 percent in February leading to solid investor interest in Indonesian government bonds, which have been far and away Asia’s best performers in 2014.

“We are observing inflows back into the local debt market, which is a positive signal for investor sentiment,” Benoit Anne, the head of emerging markets strategy with Société Générale in London, wrote in an email interview.

“I remain bullish on the rupiah. I believe that the macro backdrop is improving, while valuations remain attractive,” he noted.