Indonesian assets rebounded after officials stepped up efforts to reassure foreign investors, driving the rupiah to its biggest gain in more than a year while easing pressure on bonds and lifting stocks.
The 10-year yield fell 15 basis points on Wednesday to 7.26% after climbing as much as 64 basis points in the past two days. The rupiah strengthened as much as 0.9%, while the benchmark stock index rose 3.4%.
The rebound offered some relief for Indonesian markets, which have fallen out of favor with global investors concerned over President Prabowo Subianto’s increasingly interventionist economic agenda. Financial markets will be watching closely for further policy signals from Jakarta after foreign investors pulled a net $3.7 billion from local equities and $594 million from bonds this year.
“We are seeing early signs of stabilization, but it’s still fragile,” said Jeff Ng, head of Asia macro strategy at Sumitomo Mitsui Banking Corp. in Singapore. “Confidence takes time to build and the recent steps are a good starting point.”
Central bank governor Perry Warjiyo led a call with US and European investors late Tuesday to take questions on the central bank’s surprise interest-rate increase and held another one this morning in Asia. Finance minister Purbaya Yudhi Sadewa reassured lawmakers yesterday that he will uphold the budget deficit limit, a key concern for fund managers.
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Bank Indonesia is expected to keep raising interest rates when it meets next week, after the 25-basis-point hike in an off-cycle meeting on Tuesday.
The central bank’s “stronger policy focus on stabilizing the rupiah is helping to alleviate some bearish pressure on the currency,” said Lloyd Chan, foreign-exchange strategist at MUFG Bank in Singapore. “That said, uncertainty remains high, and we expect any rebound to be modest rather than a full reversal to last year’s levels.”
Read: Demand For Indonesian Bonds in Auction Drops to One-Year Low
Like many Asian economies, Indonesia is feeling the strain of elevated oil prices as a net energy importer. Higher crude costs are swelling the government’s fuel-subsidy bill at a time when revenues remain under pressure and borrowing costs are climbing, fueling speculation that the country’s sovereign credit rating may come under threat.
Indonesian assets have slumped this year, with the rupiah shedding about 7% against the dollar to rank as Asia’s worst-performing currency, while equities have tumbled more than 30%, the biggest decline among global primary indexes.
“Back-to-back hikes have signaled the policymakers’ preference to act proactively to stabilize the markets, spurring hawkish expectations which will help slow one-sided moves in the currency,” wrote Radhika Rao, senior economist at DBS Bank Ltd.