Analysis of the reasons for the sharp decline in the Indonesian stock market

Recently, the volatility of the Indonesian stock market has intensified, and on Tuesday (March 18th), the trading suspension mechanism was triggered due to a 5% drop. Since hitting a historic high in September last year, the Indonesian stock market has fallen by over 20%, entering a technical bear market.

According to Bloomberg, the sharp decline in the Indian stock market highlights market concerns about Indonesia's new government policy shift, fiscal health, and the risk of political intervention. These concerns are also considered the core reasons for the stock market crash.

One of the concerns: the new government's policy shift

Just a year ago, the market was full of confidence in the future of the Indonesian economy, with widespread expectations that the new president Prabowo Subianto would continue his predecessor Joko Widodo's pro business policies.

Under the leadership of former President Joko Widodo, Indonesia has successfully attracted a large amount of foreign investment through a series of reform measures, including simplifying the investment approval process, relaxing foreign investment restrictions, and promoting infrastructure construction. These policies have made Indonesia one of the highlights of economic growth in Southeast Asia.

However, after President Prabowo took office, the economic reforms expected by the market did not continue, and were replaced by new priorities that have not yet been clearly defined, prompting investors to reassess the investment value of the Indonesian market.

People expect the new president to continue advancing the established agenda, but instead, they see a transition towards new priorities, "said Thea Jamison, Managing Director of Change Global Investment LLC." And this priority has not yet been truly defined and clearly articulated

Worries 2: Financial Health Status

Market observers have noticed that the new government is paying more attention to the domestic development agenda, including strengthening food safety and expanding social welfare programs.

Analysis suggests that the ambitious high cost welfare plan of the new government has brought enormous pressure to the national finances, and even threatened the sustained development of the economy.

The market is undoubtedly most concerned about the health of Indonesia's public finances. The phenomenon of budget deficit at the beginning of the year and a 20% decrease in fiscal revenue has planted hidden dangers for the future.

Against the backdrop of unclear budget allocation plans and a lack of new revenue generating measures, investors have questioned the financial management capabilities of the new government.

Worries 3: Risks of Political Intervention

What exacerbates investors' concerns is the newly established sovereign wealth fund Danantara, which reports directly to the president. The companies controlled by the fund account for over one-fifth of the Indonesian Composite Index (JCI), which has raised concerns in the market about political interference and transparency risks.

Investors are concerned that the government may sacrifice spending in other areas or achieve political goals through Danantara in order to prioritize the development of specific projects, thereby harming market fairness and investors' interests.

Indonesia's central bank faces challenges

With the stock market plummeting, foreign capital outflows are also accelerating. Since the beginning of this year, overseas investors have net withdrawn $1.6 billion from Indonesian stocks. According to Bloomberg, since Prabowo took office, the net outflow of foreign investment has significantly increased, which to some extent reflects concerns about policy uncertainty.

When the policy path of an emerging market becomes unclear, global investors naturally adopt a wait-and-see attitude, "said an anonymous Asian regional fund manager." Indonesia needs to clarify its economic development strategy as soon as possible, otherwise it may face the risk of sustained capital outflows

In addition, Goldman Sachs has downgraded Indonesia's stock rating from overweight to market weight, reflecting market concerns about weakened profitability, policy uncertainty, and expanding fiscal deficits.

The Indonesian central bank also faces challenges in this situation. On the one hand, it is necessary to maintain currency stability to prevent capital outflows; On the other hand, it is also necessary to support economic growth.

The Wall Street Journal reported that central bank officials privately admit that the uncertainty of the policy environment has increased the difficulty of their work. Market expectations suggest that the Indonesian central bank may need to take more proactive measures in the coming months to stabilize market sentiment.

Investors are closely monitoring Indonesia's central bank's monetary policy meeting on Wednesday, hoping that policymakers can take measures to stabilize financial markets and boost growth.