It was all going so well.
But after a surprisingly strong start to 2014, the rupee and rupiah have returned to weak form this week amid elections in India and Indonesia.
After early counting, Indonesia’s rupiah on Monday hit a six-week low on concerns that the next government would be fragmented.
For India, meanwhile, Monday brought with it the rupee’s biggest one-day fall in more than a month as voting continued in the country's eye-wateringly long election process.
On Tuesday, both weakened further: the rupee by 0.29% to around 60.76 against the dollar, the rupiah by 0.66% to around 11,521.
“Elections continue to be a major event risk for both currencies,” HSBC said in an analyst report this month. “Much will depend on the reform process after the elections are over.”
This could be something of a problem as the elections have some way to go before producing any kind of decision.
Parliamentary elections were held in Indonesia on April 9 but the votes are still being counted and a result will not be announced for another few weeks. Then attention will turn to the country's presidential election on July 9, where the favourite for the job – Joko “Jokowi” Widodo – is now unlikely to get an easy path to the top job.
India, meanwhile, kicked off its general election on April 7 but the entire process will take more than a month and the favourite for the prime minister’s job -- Narendra Modi -- is seen as a divisive figure due to his political history.
Indonesia
The setbacks are particularly galling for the rupiah, which for so long has been the whipping boy of currency markets -- until the start of the year, that is.
From January 1 2014 to April 8 it rose more than 7% on hopes that Jokowi, the popular Jakarta governor (pictured below), would gain the presidency and remove political uncertainty from the country. His party, the PDI-P, was therefore expected to obtain a clear majority and smooth his passage into power, clearing the way for a degree of economic clarity.
The consensus among currency analysts and investors at the end of last year was that the rupiah should be sold, Craig Chan, head of FX strategy Asia ex-Japan for Nomura, told FinanceAsia. "But as we moved through January we saw big [capital] inflows and then people jumped on the Jokowi story and the shorts got hammered,” Chan said.
However, since voting began on April 7 the rupiah has dropped 1.3% and the Jakarta Composite index of leading Indonesian shares has fallen 0.60%.
The latest twist tells the story of a country left wondering what the next government will look like and when the uncertainty will disappear.
“The results [so far] are a shock to a lot of people,” Euben Paracuelles, Southeast Asia economist for Nomura, told FinanceAsia. “Not just because of PDI-P’s underperformance but because of how well other parties performed.”
The lack of a clear result introduces uncertainty ahead of the presidential elections, which will complicate policy-making as the government will be more fragmented, Paracuelles said.
This is a shame as Indonesia has been wracked with political and economic uncertainty for years.
Barriers to sizeable foreign investment have been compounded by recent reforms of export laws, heaping pressure on the country’s companies and those foreign groups present in the country.
That said, a change of government and president was not seen likely to lead to a sea change and HSBC in its report said recent optimism for the rupiah on the back of Widodo's nomination might not be sustained after the elections.
Chan concurred, saying that the rupiah’s correction is more like a wake-up call to political reality; albeit a disappointing one.
“[The change in government] is pretty much business as usual. This means lots of regulatory risks and changing rules of the game,” Xavier Jean, corporate rating analyst at Standard & Poor’s, told FinanceAsia.
India
India is grappling with its own uncertainty.
The rupee strengthened 3% from January 1 to April 7 as equity and debt inflows bolstered the country’s markets in the weeks leading up to India’s convoluted election process.
Net purchases of nearly $4.8 billion in shares this year sent the rupee to an eight-month high of 59.5950 in early April.
Then the voting got under way. Between April 7 and Tuesday, the rupee fell 0.83% against the dollar. The National Stock Exchange rose 0.24%.
“Since the start of the month the rupee has not performed. There has been a lack of momentum and a lack of positive data,” Chan said.
India’s incumbent Congress party is effectively facing off against the main opposition BJP, led by people’s favourite Modi (pictured left).
Although the BJP has positioned itself as a business-friendly party, it remains unclear how far it would go in opening up the country’s industries to foreign investment, particularly the contentious retail sector.
India, the world’s biggest democracy, is something of an enigma and the reality will see a plethora of possible coalition partners – the BJP leads the National Democratic Alliance – possibly upset the apple cart.
According to the HSBC report, a strong coalition with a workable mandate would be the best possible outcome for the currency as it would pave the way for much-needed structural reforms. This is easier said than done.
Analysts expect the currency to remain in a tight range due to the uncertainty during the election process. Events in the Ukraine have not helped and Mumbai goes to the polls on Thursday.
“Exit polls will come soon and expectations have grown,” said Chan. “The consensus is now likely to be that the NDA and pre-poll alliance will win around 230/240 seats. If we get 200-230 there is a risk the market will sell off. Below 200, definitely.”
One thing is certain: the next few months are anything but.
