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We believe the best outcome in this election is for a continuation of existing policies and stability. Ex-president Joko Widodo’s policies have been very supportive of the financial sector and have reduced barriers to entry relative to other emerging market nations, helping to introduce healthy competition. All things come to an end though, and the constitution requires that Joko Widodo cannot stand for a third term.

A supportive environment for equities set to continue

Indications show a resounding win for Prabowo Subianto, with 60% of the vote (official results are due by 20 March). But the election of President Prabowo does not necessarily signal a U-turn in policy or the domestic political environment. His policies are expected to be largely consistent with his predecessor. The government has already been very encouraging of digital bank start-ups, and we expect this to continue under President Prabowo. As long as there are no big surprises in policy, the political environment should remain supportive of Indonesian equities and especially the financial sector. A stable environment should help the sector continue to thrive and grow, especially in areas such as microfinancing/loan growth, banking penetration and growth of digital finance.

Financial sector remains a key area of growth

The government has an interest in the success of the financial sector because it has a substantial stake in it. Three of the four large banks in Indonesia have significant government ownership. But not all state-owned enterprises (SOEs) are built equally; unlike other emerging market countries, in Indonesia these have an alignment of interests with investors and, importantly, they have quality growth characteristics. Furthermore, the government support of the sector more broadly has encouraged healthy competition and allowed for greater penetration. Indonesia currently has around 15 digital banks, having grown from just seven in 2021, with more licences expected this year.1 It is also hugely underbanked—we see this as a key area of growth and we believe the election results are supportive of this continuing.

Indonesia is One of the Most Underbanked, Populous Countries in the Emerging Markets Asset Class

Percentage of Population With a Bank Account: Emerging Markets
July 1, 2021-June 30, 2022

Sources: Global Findex Database, World Bank. Account ownership at a financial institution or with a mobile-money-service provider (% of population ages 15+) in 2021. *Mexico data shown for 2022. Each economy is classified based on the classification of World Bank Group's fiscal year 2022 (July 1, 2021-June 30, 2022).

The market agrees

Upon the albeit unofficial results announcement, the MSCI Indonesia Index2 rose 1.8%. Banks led the rally, with some reaching record highs on foreign inflows. Infrastructure-related stocks also benefited from the expected continuation of construction projects for the new capital city, Nusantara. Finally, consumer staples were boosted by Prabowo’s free lunch programme in schools.3 We are excited to see how this develops.

Endnotes

  1. Source: International Trade Administration, Indonesia Digital Banking, September 19, 2021.
  2. The MSCI Indonesia Index is designed to measure the performance of the large and mid-cap segments of the Indonesian market.
  3. Sources: Martin Currie and Bloomberg as of February 15, 2024.


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