Advertisement

Indonesia's currency slides as emerging markets sell off

The emerging markets sell-off has pushed the Indonesian rupiah to its weakest level against the dollar since the 1998 Asian crisis.

913_MW_P07_Markets
Indonesia has bolstered its defences against the rupiah sell-off

Credit: PACIFIC PRESS / Alamy Stock Photo

The emerging markets sell-off has pushed the Indonesian rupiah to its weakest level against the dollar since the 1998 Asian crisis. This year thecurrency has shed 9%.Indonesia has "a history of volatile inflation and currency moves", notes Reuters. Its current fragility comes from a mix of longstanding and new factors. The current-account deficit has widened "worryingly". In the second quarter of the year, it amounted to about $8bn. The central bank expects it to grow from last year's 1.7% to 2.5% of GDP in 2018.

Advertisement - Article continues below

Emerging-market investors are always rattled by external deficits, since they require filling by foreign capital and higher US interest rates are drawing capital away from traditionally risky assets such as emerging markets. Meanwhile, Indonesia exports commodities such as natural gas, rice, palm oil, tin and copper, so its fortunes can fluctuate in line with volatile raw materials prices.

Staying cool in a crisis

"Indonesia's best defence of its currency may be a cool head," says Clara Ferreira-Marques on Breakingviews. Jakarta is now better placed to defend the rupiah than it was two decades ago. That's because its foreign-exchange reserves are bigger and its external debt, at 20% of GDP, is lower than in more vulnerable emerging markets such as Turkey or Argentina. The Bank of Indonesia has also sensibly raised interest rates four times since May to bolster the currency.

One key risk in the country is the recent rise of Islamist politics, which is threatening to undermine the country's civil liberties, says Yaroslav Trofimov in The Wall Street Journal. Almost 90% of the 270-million-strong population are Muslim. There is also widespread animosity against the country's ethnic Chinese minority, which plays "an outsize role in the country's economy". Next year, presidential elections are looming, so investors will continue to keep a wary eye on the political backdrop.

In the long run, though, Indonesia's economy has the potential to do well. As the trade dispute between the US and China threatens to unsettle the global economy, Indonesia may be cushioned by its large domestic market and promising demographics. It is less reliant on exports compared with other countries in southeast Asia, as consumption accounts for more than half of its GDP.

A good long-term fix for the economy "would be continued liberalisation and stable policies that help attract cash", says Ferreira-Marques. For instance, delaying $25bn of power-plant investments was not a good move, as it hampers efforts to improve infrastructure. "Without these upgrades, Indonesia might struggle to make itself a choice destination for foreign money."

Advertisement
Advertisement

Recommended

Visit/investments/stockmarkets/600688/bullish-investors-return-to-emerging-markets
Stockmarkets

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Visit/currencies/600640/the-currencies-to-bet-on-this-year
Currencies

The currencies to bet on this year

The US dollar could be set to weaken this year, while the euro, Canadian dollar and the Swiss franc could be good bets for optimistic traders.
17 Jan 2020
Visit/519872/beware-the-hidden-risks-when-investing-in-emerging-markets
Investment strategy

Beware the hidden risks when investing in emerging markets

Emerging markets look cheap compared with developed countries, but earnings may be less trustworthy.
23 Dec 2019
Visit/517395/emerging-markets-buy-when-the-news-is-bad
Emerging markets

Emerging markets: buy when the news is bad

Emerging markets are being squeezed by local turmoil and by more general factors. But bad news can spell opportunity for investors.
5 Nov 2019

Most Popular

Visit/investments/property/601606/house-prices-crash-uk-property-prices-falling-where-next
Property

House price crash: UK property prices are falling – so where next?

With UK property prices falling for the first time in eight years, are we about to see a house price crash? John Stepek looks at what’s behind the sli…
2 Jul 2020
Visit/investments/stockmarkets/601611/nasdaq-all-time-high-markets-and-the-real-economy
Stockmarkets

How can markets hit new record highs when the economy is in such a mess?

Despite the world being in the midst of a global pandemic, America's Nasdaq stock index just hit an all-time high. And it's not the only index on a bu…
3 Jul 2020
Visit/economy/inflation/601584/the-end-of-the-bond-bull-market-and-the-return-of-inflation
Inflation

The end of the bond bull market and the return of inflation

Central bank stimulus, surging post-lockdown demand and the end of the 40-year bond bull market. It all points to inflation, says John Stepek. Here’s …
30 Jun 2020