Indonesia's stock market and rupiah plunge as policy and fiscal concerns continue to ferment

(1) On Thursday, due to ongoing concerns over Indonesia's fiscal trajectory and policy uncertainties, investors remained cautious, resulting in steep declines for both the country's stock market and the rupiah. The Jakarta Composite Index dropped as much as 5.0% to 5,644.23 points, accumulating a 34% decline year-to-date and ranking as the worst-performing market in the region. The Indonesian rupiah fell to a historic low of 18,030 against the US dollar, making it the weakest currency in Asia.(2) Analysts pointed out that the sell-off was continuing. A United Overseas Bank report noted that Dadan Hindayana, the former head responsible for President Prabowo's free lunch program, was recently dismissed and arrested. This program has sparked concerns about mounting government expenditure. In addition, Indonesia has been promoting centralization of resource sales such as palm oil and coal, which may help retain foreign exchange reserves; however, worries over implementation challenges and increased state intervention could dampen investor confidence and suppress long-term foreign investment.(3) Rating agencies Moody's and Fitch have already raised concerns regarding the reliability and transparency of Indonesia's policy decisions, and FTSE Russell and MSCI have also expressed doubts about its investability. Coupled with shocks from Middle East conflicts, Indonesia's trade surplus narrowed sharply in April and inflation continues to rise. Kenanga economists expect that, in response to inflationary pressures from the energy crisis and in support of the local currency, Bank Indonesia may defensively raise interest rates by 25 basis points this month.