Foreign investors have surged into Indonesia’s stock market in the lead-up to elections on Wednesday in which incumbent president Joko Widodo will square off against former general Prabowo Subianto for the reins of south-east Asia’s largest economy.

Net foreign inflows of more than $1bn into Indonesian stocks so far this year contrast with a net outflow of $2bn over the same period last year, reflecting a starkly different outlook for the world’s largest Muslim-majority nation. Just six months ago, the rupiah plummeted to its lowest levels against the US dollar since the Asian financial crisis of 1997-98.

The currency’s fall prompted the country’s central bank to raise interest rates six times in as many months, as the government introduced import taxes to curb purchases of foreign goods and reduce the current account deficit.

In the wake of those steps, the rupiah has climbed almost 8 per cent from its October low, while data on Tuesday show the country has run a trade surplus in March for a second straight month. The benchmark Jakarta Composite index is up 4 per cent this year.

“We are seeing more and more capital inflows to Indonesia” both for equities and for local debt, said Jean-Charles Sambor, deputy head of emerging markets fixed income at BNP Paribas. Assuming Mr Widodo — commonly known as Jokowi — is re-elected, said Mr Sambor, continued inflows would probably boost the country’s capital account, further strengthening the rupiah.

“We think the outlook for Indonesia overall is good both on the local rates side and on the foreign exchange side, and they have room to cut [rates]” from the current 6 per cent if inflation remains low and global risk appetite diminishes, Mr Sambor said. Indonesian bond yields are now the highest in south-east Asia, with that on 10-year government note at 7.6 per cent.

Foreign investors have renewed their focus on Indonesia as “the Jokowi government in the last five years has made quite good progress in terms of reforms,” said Tuan Huynh, chief investment officer for emerging markets at Deutsche Bank Wealth Management. A win for Mr Widodo “would give some reassurance that the country is on the right path”, said Mr Huynh, adding: “A lot of hope will be placed on upcoming elections.”

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Polls tip the president to defeat Mr Prabowo, whose populist campaign has tapped into nationalist sentiment and courted hardline conservative Muslims.

Assuming Mr Widodo prevails, analysts expect him to ramp up infrastructure spending, a move that would further boost property and construction stocks.

But investor confidence could be shaken if Mr Prabowo only narrowly loses or even wins, said Mohamed Faiz Nagutha, Asean economist at Bank of America Merrill Lynch.

“A closer-than-expected result or an unexpected victory for Prabowo would almost certainly bring a challenge and increase nervousness around policy certainty,” Mr Nagutha.



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