Indonesia’s investors fret over Prabowo’s free school meals pledge

Prabowo and his team have tried to distance themselves from any suggestions of fiscal profligacy, and to assure market participants the incoming government respects the legal debt limits that cap its budget deficit at 3 per cent of economic output.

But for a market just getting accustomed to stability and recognition for fiscal prudence under current Finance Minister Sri Mulyani Indrawati, the mere suggestion of heavy spending has been unsettling.

Bond yields have risen and the rupiah has depreciated, though the currency weakness has largely been due to a resilient US dollar.

“Our base case remains that this is more of noise at the moment, but we do see increasing fiscal risk and hence the market may start to require more risk premium on Indonesian government bonds,” said Jenny Zeng, chief investment officer for APAC fixed income at multinational financial services company Allianz.

A banker at a Chinese lender in Indonesia said the fiscal concerns had prompted it to move around 30 per cent of its portfolio into lower-tenor instruments, including diversifying into rupiah-denominated short-term securities issued by Bank Indonesia.

Some investors even see merit in Indonesia spending more to achieve its 8 per cent economic growth target. Yet there’s unease over how much money Prabowo intends to spend on his programmes, and whether he will cut fuel and other subsidies and investments in order to balance the books.

“It appears there will be more uncertainties than certainty. I still stay invested but probably not as overweight as I used to be,” said Clifford Lau, a portfolio manager at multinational investment bank William Blair.

Foreign portfolio investments have been shrinking, with overseas investors pulling US$2.8 billion from