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Voters in India and Indonesia choose continuity over change

August 23, 2019 — In this Q&A, the Eaton Vance floating-rate loan team offers its perspective on today’s loan market.

By: Craig P. Russ; Andrew Sveen, CFA; Ralph Hinckley, CFA; Christopher Remington

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By Emerging Markets Debt TeamEaton Vance Management

Boston: As two of the larger Asian economies, India and Indonesia are often compared with each other by emerging markets (EM) debt investors. They both offer somewhat higher yields and have economies that are largely domestically driven, rather than export-driven. Also, both countries recently re-elected their leadership. In this week's blog, the Emerging Markets Debt team offers its view on the impact of the elections.

Modi 2.0

Indian Prime Minister Narenda Modi and his BJP party outperformed expectations and 2014 results in the May election, securing a majority in parliament. The expectation had been that Modi would remain in power, but would require the support of other parties to secure a majority. But he benefited from a shift in voter focus from the weak economy to security as a result of the conflict with Pakistan leading up to the election.

Modi was successful in implementing big-picture reforms in his first term, including the goods and services tax (GST), demonetization and a new insolvency code. Some of the momentum faded ahead of the election, but his victory has sparked optimism among market participants that Modi has received a mandate to continue with the reform program.

Modi will also need to focus on rejuvenating economic growth after recent weak quarters, especially within the rural sector, if the government is to hit the goal of a $5 trillion economy by 2025.

We remain skeptical that Modi will be able to meet such high expectations for his second term, but the recent budget update was a good start. The government showed that it remains committed to fiscal prudence and did not bow to pressure to increase spending to support the economy.

Jokowi 2.0

Indonesian President Joko Widodo - more commonly known by his nickname, Jokowi - defeated General Prabowo Subianto with a 55-45 margin in the April election. The result met poll expectations and saw a bigger margin than the 2014 election, where Jokowi beat Prabowo with a 53-47 margin.

However, Prabowo supporters rioted against police in Jakarta and the general challenged the election in the Constitutional Court. In the end, the Court ruled against the election fraud allegations and confirmed Jokowi's second five-year term.

We do not believe Jokowi's second term will bring significant changes. The government will likely continue current fiscal and monetary policies, the infrastructure push, and institutional and social services improvements. Despite Jokowi's image as a small business-oriented politician, big improvements in the ease of doing business and FDI liberalizations are unlikely. The market's expectation is broadly in line with this baseline view.

Going forward, the risks are in the lagging exports, unstable commodity sector policies and potential crowding-out by the state-owned enterprises.

Bottom line: Voters in two of Asia's largest economies chose continuity over change and, on balance, EM investors appear to approve of the choice.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.