Is Indonesia next on the list of emerging market victims this year?

Author: Justin Low | Category: News

The Indonesian rupiah weakened to its lowest levels since the 1998 crisis earlier

And it required the central bank to once again intervene in the market to stem those declines. Emerging markets are making a big fuss this year with Argentina, Brazil, South Africa, Turkey, and India all facing problems. Although Indonesia's woes aren't as massive as those faced by Argentina and Turkey, it's still a problem nonetheless.

Much like India, Indonesia also runs a current account deficit and the fact that it relies heavily on foreign investors in its bond market means that the country is particularly vulnerable to capital outflows. With the situation in Turkey and Argentina exacerbating confidence in emerging markets, Indonesia is among the ones hardest hit by sentiment in Asia.

The central bank has already moved to raise rates by 125 bps since May and also intervened to limit the rupiah from sharp falls, but there's only so much you can do to fight the market. The government is also playing their part in all of this by restricting goods imports as well as potentially oil imports in an effort to bolster reserves and at the same time reduce outflows in the rupiah.

But will it be enough?

The thing about Indonesia is that it is facing a very different situation from the countries above. The reserves are holding up well and the economy is still relatively solid. GDP growth in Q2 was 5.27% y/y - the best reading since 2014. That said, growth looks set to come in at ~5.2% in 2018 and that is still relatively decent.

That will at least add good reason for investors to not shy away from Indonesian assets - which are one of the highest yielding ones in the region.

However, the fact remains that the Fed is still going to go ahead to hike rates further and that will continue to weigh on emerging markets. And further blow ups in other countries alongside those mentioned above is going to exaggerate negative sentiment even more, and that means there could be more pain still to come for the rupiah. But the same can be said for the rest of the other emerging market currencies at this point.

So, Indonesia's central bank and government may step in every now and then to help curb market volatility. But all they are doing is slowing down the bleeding, there's not much else they can do to sew up the wound.

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