Indonesia’s financial authorities have implemented a series of measures aimed at stabilizing the financial markets following a sharp fall in the country’s stock market and the rupiah currency. On Wednesday, Indonesia’s financial services regulator allowed listed companies to repurchase their stocks without needing shareholder approval, and the central bank conducted “bold” interventions in the currency markets.
These steps followed a significant market drop on Tuesday, where the Jakarta Composite Index (JKSE) plummeted by as much as 7.1% amid concerns over the government’s policies, fiscal position, and economic growth prospects. The market did show signs of recovery, rebounding by approximately 1% as of 0430 GMT Wednesday, after the announcement of the new measures. However, the rupiah continued its decline, falling by as much as 0.7% despite the Bank of Indonesia (BI) intervention.
Bank of Indonesia’s Efforts to Stabilize the Rupiah
The fall in the rupiah was exacerbated by global factors such as U.S. trade policies, expectations surrounding the Federal Reserve’s decision later this week, and growing tensions in the Middle East. Fitra Jusdiman, director of monetary and securities asset management at Bank Indonesia, stated that the central bank is continuing its “anticipatory, mitigatory responses” to ensure stability in the rupiah exchange rate and manage foreign exchange supply-demand.
BI has and will continue anticipatory, mitigatory responses to ensure stability in the rupiah exchange rate, maintain FX supply-demand, including by intervening in a bold and measured way,” Jusdiman explained. Despite these efforts, the rupiah continued to face pressure.
Regulatory Measures to Boost Market Confidence
Indonesia’s financial services regulator introduced temporary rules to allow companies to conduct stock buybacks for the next six months. The goal is to help stabilize the market by boosting investor confidence, particularly for companies with strong fundamentals. Inarno Djajadi, the chief regulator for the capital market at the Indonesia Financial Services Authority, emphasized that these measures are aimed at reducing volatility and providing companies with more flexibility to manage stock price fluctuations.
“Companies with good fundamentals should be able to send a positive signal to the market,” Djajadi noted. “This will provide market confidence to investors and give flexibility to listed companies to reduce share volatility.”
Impact on the Stock Market and Foreign Investors
The market sell-off was attributed to several factors, including growing concerns over the government’s policies and the increasing role of the military in civilian positions. President Prabowo Subianto’s government has faced criticism for its perceived fiscal risks and speculation about the resignation of Finance Minister Sri Mulyani Indrawati, which she later denied. Moreover, investors are wary about the proposed changes to the military law, which would allow the military to hold more civilian posts, potentially within state institutions.
Ari Jahja, head of Indonesia research at Macquarie Capital, pointed out that the potential expansion of the military’s role has been a major concern for investors, especially in light of the upcoming passage of the revised military law in Parliament. Budi Djiwandono, a lawmaker and deputy head of the parliamentary committee overseeing the law’s revision, assured that active military personnel would not be placed in state-owned companies, attempting to ease investor concerns.
Foreign investors, who make up around 40% of Indonesia’s stock market participants, were significant net sellers on Tuesday, with sales totaling around 2.49 trillion rupiah ($150.68 million), reflecting the broader nervousness surrounding the market.
Central Bank’s Upcoming Policy Decision
Bank Indonesia is set to hold a press conference later on Wednesday to review its monetary policy. Economists are divided on what the central bank will do next, with some predicting a 25 basis point (bp) rate cut, while others expect the central bank to hold rates steady to prioritize the stability of the rupiah.
William Jackson, Chief Emerging Markets Economist at Capital Economics, noted the difficult balancing act for BI. While Indonesia faces low inflation and slowing economic growth—factors typically conducive to rate cuts—concerns over currency stability could lead BI to take a more cautious approach and keep rates unchanged.
In conclusion, the Indonesian government and central bank are taking proactive steps to stabilize the currency and reassure investors. However, ongoing political uncertainties and global economic factors will likely continue to challenge market sentiment in the near term.
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