The news for some of Southeast Asia’s big stock exchanges has not been great lately. Since mid-September 2024, the Jakarta composite index has declined by around 18 percent. On March 18, it plummeted 5 percent in a single day, triggering an automatic suspension of trading on the exchange.
And Indonesia is not the only stock market in the region on a bumpy ride. Thailand’s SET index has contracted by a similar amount over the same time period, though there’s been no major single day sell-off like we just saw in Jakarta. Both the Indonesian rupiah and Thai baht have also seen some depreciation since September.
So what does all of this mean? Are investors really souring on Southeast Asia. And if so, why?
The most obvious explanation is that growth in the region, or at least in some of the major regional economies, may be slowing down. Thailand’s export-oriented economy has struggled to recover from the COVID-19 pandemic, consistently underperforming economic forecasts. And the current state of global trade does not bode well for trade-dependent countries like Thailand. Meanwhile, the government is running a rather large deficit to pay for stimulus measures of questionable effectiveness such as the multi-billion-dollar digital wallet scheme. All of this is likely generating caution among investors.
In Indonesia, there is data indicating some weakening of consumer purchasing power. A few big firms, like textile giant Sritex, have gone bankrupt and laid off thousands of workers, while the state-owned energy company Pertamina is currently embroiled in a major corruption scandal. The government, which has only been in power for a few months, is struggling to reassure markets that it has a handle on fiscal policy. The creation of a super-holding investment fund with a vaguely defined remit, along with reports of shortfalls in tax revenue collection, seem to have spooked investors.
These are clearly important factors, many of which could have been avoided with different policy choices. But there are also external factors helping to accelerate capital outflows and volatility in the region. The main one is that the global economy is entering a period of heightened uncertainty and risk, with trade disputes becoming the norm as the largest economy in the world acts in an increasingly unpredictable and hostile manner.
We don’t know what’s going to happen with these trade conflicts, but we know that they are increasing the general level of uncertainty and risk in the global economy. And if there is one thing markets hate, it is uncertainty. When uncertainty is high, investors like to move into more liquid assets in supposedly safe markets. In practice, this means selling off riskier assets (say, emerging market equities) and moving into liquid dollar-denominated assets.
Capital outflows, weakening of stock markets, and currency depreciation in some of Southeast Asia’s biggest economies can therefore be attributed to a combination of internal and external factors. Global economic headwinds and uncertainty generated by trade disputes would likely have caused currency volatility and stock sell-offs in any case. But governments in the region are not doing themselves any favors by experimenting with unorthodox fiscal and other economic policies at a time of sharpening geopolitical tensions and increased risk in the global economy.
Are investors right to be cautious on Thailand and Indonesia? That is of course difficult to say. Thailand is likely to face an uphill climb as long as global trade remains disrupted, and there is no reason to believe things will improve on that front any time soon. In Indonesia, the narrative that the economy is facing serious challenges is gaining momentum. Personally, I think we need more data before we can make any definitive claims. But it doesn’t matter what I think. The perception of increased risk can move markets, and the market just sent the government of Indonesia a pretty clear message about how it feels in that regard.