On a remarkable Wednesday, the Jakarta Composite Index surged by an impressive 3.8%, buoyed largely by the performance of some of Indonesia’s most prominent banks. Investors were particularly drawn to PT Bank Negara Indonesia Persero, PT Bank Mandiri Persero, and PT Bank Rakyat Indonesia Persero, which have shown strong profitability. This surge comes as part of broader efforts to bolster market confidence amid concerns regarding President Prabowo Subianto’s populist initiatives and the government’s increasing control over state enterprises.

Dividend Payouts Enhance Investor Confidence

The announcement of substantial dividend payouts, totaling 109.2 trillion rupiah (approximately $6.6 billion), plays a critical role in reassuring investors. This move, alongside actions from the central bank and the newly established sovereign wealth fund, aims to counteract fears stemming from the current economic climate, where stocks have depreciated nearly 20% since their peak in September. Additionally, the Indonesian currency has seen its lowest valuation since the Asian financial crisis.

• Key Insights:
  • Currency nearing historical lows
  • Weak economic growth outlook
  • Need for enhanced corporate governance

According to Ken Wong, an expert in Asian equities at Eastspring Investments, to attract foreign investments, it is essential to improve corporate governance and increase dividend payouts. This is especially critical as Bank Indonesia has actively intervened to stabilize the rupiah, which has lost around 3% against the dollar this year.

Strategic Moves by Danantara and Government

The newly formed Danantara, Indonesia’s sovereign wealth fund initiated by President Prabowo, has sought to instill confidence among investors by appointing a prestigious advisory board that includes two former presidents and Ray Dalio, the founder of Bridgewater Associates. UBS Group AG analysts, including Joshua Tanja, noted that this credible management could significantly mitigate perceived risks associated with the government’s economic policies.

Earlier this month, Danantara began overseeing state-owned banks, including the aforementioned institutions. Traditionally, the dividends from these banks would have contributed to government revenue, which is now facing an unexpected fiscal deficit. The fiscal measures implemented by President Prabowo since taking office in October have raised concerns that the budget deficit could approach the legal limit of 3% of the gross domestic product.

Record Dividend Payout Ratios

In a significant development, Bank Mandiri’s shareholders approved a 78% dividend payout ratio, marking a historic high. Other banks followed suit, with PT Bank Negara Indonesia Persero announcing a 65% payout, an increase from last year’s 50%, and Bank Rakyat Indonesia declaring a noteworthy 86% payout. Analysts from RHB highlighted that Mandiri’s unexpected dividends translate to an attractive 10% yield, likely contributing to a rebound in share prices.

Foreign Investment Challenges

Despite these positive developments, Indonesia faces the challenge of reversing foreign capital outflows, with global funds withdrawing a net $2 billion from Indonesian equities this year—one of the highest figures in Southeast Asia. This trend has intensified the strain on the rupiah, currently the worst-performing currency in the region. Meanwhile, the yield on benchmark 10-year bonds has risen nearly 40 basis points since February, and PT Bank Tabungan Negara recently canceled a planned dollar debt issuance.

Analysts from Mizuho Bank Ltd. and MUFG Bank Ltd. predict that the currency could weaken beyond the 16,950 per dollar level established in 1998, with trading around 16,583 as of Wednesday. Lloyd Chan, an FX strategist at MUFG, pointed out that increasing fiscal risks related to the new administration’s social programs are causing heightened market anxiety.

As the Indonesian market prepares for a holiday closure from March 28 to April 7, traders are anticipating rising volatility, particularly in the wake of potential announcements like U.S. tariffs set to take effect on April 2.

These developments highlight the dynamic nature of Indonesia’s financial landscape as it navigates complex challenges while striving to attract investment in an uncertain economic environment.