Brown Brothers Harriman’s (BBH) Elias Haddad reports USD/IDR has hit a fresh record high above 18,000, while Indonesian equities have slumped to multi-year lows. Haddad links this to concerns over Bank Indonesia’s (BI) independence, potential MSCI reclassification, rating agency caution and an energy shock via the Strait of Hormuz, concluding that despite fundamental undervaluation, Indonesian Rupiah (IDR) will stay under downside pressure for now.

Record-high USD/IDR and equity stress

"USD/IDR rallied to a fresh record high above 18’000 and the Jakarta Stock Exchange Composite Index plunged to its lowest level since November 2020. The trigger is the potential erosion of Bank Indonesia’s (BI) independence."

"Indonesia's parliament passed today a legislation that explicitly adds support for economic growth and job creation to the BI’s objective, alongside price and financial stability. This could tilt BI policy toward supporting President Prabowo's ambitious 8% real GDP growth target rather than focusing on inflation and the rupiah."

"IDR and Indonesian equities sit at the bottom of their respective league table year-to-date undermined in part by a potential MSCI reclassification and cautious shift from debt rating agencies."

"The energy supply disruption triggered by the Strait of Hormuz blockade has amplified Indonesia’s financial market woes. Indonesia is a net crude oil importer with around 25% of its oil imports passing through the strait."

"IDR undervaluation looks excessive relative to domestic fundamentals. But until the energy shock fades, IDR will remain under downside pressure."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)