VIEW: ANZ Sees Politics Weighing On Markets But Risks To Upside

ANZ sees the outcome of Indonesia’s February 14 presidential election as unclear given recent polls and that political uncertainty could weigh on local markets but the risks are still skewed to the upside for Indonesian assets due to rate cuts on the horizon and cheap valuations.

• “Sentiment in the IDR local markets has been weighed down by the uncertainties. While it is difficult to measure political risk premium, there is anecdotal evidence as we see reflected in local markets. The currency has underperformed the DXY index as well as its regional and the broader emerging market peers in recent months after a clear outperformance in the first nine months of 2023.”
• “Foreign bond portfolio inflows were robust heading into the April 2014 and April 2019 presidential elections, but the combination of depressed yield spread over US Treasuries and heightened political risk has dried up portfolio flows this time.”
• “A one-round election could provide a positive relief, provided the results show a clear margin of win.”
• “The long period of wait between election day and the deadline for results certification could see increased tension, especially if quick count results (available from election day) show a tight margin of win for the top candidate pair.”
• “In the event of a presidential election run-off, the political coalitions behind the three candidate pairs would likely collapse into two, thereby changing the power dynamics heading into the 26 June election. The legislative election results would have been certified by 20 March, allowing political parties to renegotiate coalition terms. The fluid dynamics could cause more volatility in IDR local markets.”