Indonesia to Hold Key Rate as Prabowo Win Reduces Uncertainty

Grace Sihombing
·3 min read
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

(Bloomberg) -- Indonesia’s central bank will likely keep its benchmark interest rate steady as Prabowo Subianto’s impending victory in the presidential race removes the uncertainty of a lengthy election process, even as the rupiah remains volatile.

Most Read from Bloomberg

All 30 economists in a Bloomberg survey expect Bank Indonesia to keep the BI-Rate at 6% for a fourth straight month on Wednesday, a week after the election for a successor to President Joko Widodo who ends his decade-long tenure in October. Prabowo has claimed victory on Feb. 14, citing independent pollsters.

Defense Minister Prabowo and his running mate Gibran Rakabuming Raka — the eldest son of incumbent Jokowi — have garnered nearly 60% of the vote, based on the latest official count by the poll body which will announce the results by March 20. If the trend holds, Prabowo would have more than enough votes to cross the 50% threshold to win and avoid a second-round balloting in June.

Prabowo’s likely victory means financial markets will not be in limbo for much longer. His promise to continue Jokowi’s policies is set to firm up investor confidence in Southeast Asia’s biggest economy and help shore up the currency as traders pulled back bets for an early Federal Reserve rate cut after strong US employment and inflation data this month.

“Armed with political stability, the central bank is likely to be focused on global developments and stay on an extended pause,” said Radhika Rao, an economist with DBS Group Holdings Ltd.

Here’s what to watch on the rate briefing at 2 p.m. local time Wednesday:

Vulnerable Rupiah

The rupiah hasn’t found firm footing despite the prospects of a one-round election. The currency has dropped 1.7% against the dollar this year, underperforming a broader gauge of emerging-market currencies.

Indonesia has posted net foreign outflows so far this year as markets push Fed cut bets to June, from a previously estimated four-in-five chance of easing in March, based on data compiled by Bloomberg.

Indonesia’s policymakers will likely continue using tools like the rupiah securities or SRBI to lure inflows that would strengthen the currency, reducing the need for BI to intervene in the market and use up its FX reserves. Bank Indonesia sold 96 trillion rupiah ($6.1 billion) of SRBI in January, the most since the instrument was introduced in September.

“Global risks, especially related to geopolitics and the Fed’s policy direction, will still drive the financial market dynamic and ultimately BI’s monetary policy,” said Dian Ayu Yustina, an economist at PT Bank Mandiri.

Transition Period

Post-election, investors will set their sights on how smooth the transfer of power will be.

Reports of a possible resignation by several ministers in Jokowi’s cabinet, including Finance Minister Sri Mulyani Indrawati, rattled markets in January. Prabowo’s costly campaign promises have also raised anxiety about the future of Indonesia’s fiscal stance, which under Indrawati was kept at a low deficit and debt ratio.

“The next challenge for Prabowo-Gibran is how they can maintain political stability during the leadership transition period,” Enrico Tanuwidjaja and Agus Santoso, economists at United Overseas Bank Ltd., wrote in a note.

Indonesia’s economy has shown some resilience despite borrowing costs near a five-year high. Gross domestic product expanded at 5% last year, buoyed by consumption, investment and government spending. With Bank Indonesia signaling room for rate cuts only in the second half, the strength of domestic demand will largely hinge on government programs to stimulate spending.

--With assistance from Tomoko Sato and Matthew Burgess.

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.