As a full-blown financial crisis in Turkey threatens to engulf global emerging markets, Indonesia is taking a bigger knock than its peers in Asia. The rupiah slumped to an almost three-year low against the dollar and stocks are being dumped. The central bank is selling billions of dollars from its reserves to halt the rout and may be forced to raise interest rates again after three hikes since mid-May.
1. What triggered the selloff?
Even before the Turkey crisis, emerging markets have been under pressure because of rising U.S. interest rates and a stronger dollar. Part of the appeal of emerging markets is their relatively higher yields compared with developed markets. When that differential falls because of the U.S. Federal Reserve raising borrowing costs, emerging markets become less attractive. The turmoil in Turkey adds to emerging-market woes because it reduces investors’ appetite for risky assets and accelerates the movement of foreign capital from higher-yielding securities to relatively safer ones in developed markets.
2. Why is Indonesia being targeted?
It’s one of a few Asian emerging markets that runs current-account deficits (so do India and the Philippines), and recent data shows it widened to a four-year high. The deficit economies rely on foreign inflows to finance their import needs, making them vulnerable to a slump in sentiment and sharp outflows. Foreign investors own almost 40 percent of Indonesia’s government bonds, among the highest of Asian emerging markets. Add to that the government runs a budget deficit, meaning it needs to borrow to finance spending.
3. How badly are the currency and stocks faring?
The rupiah is the worst performer in Asia since the emerging-market selloff began in late January, weakening 9 percent to its lowest level against the dollar since 2015. The Jakarta Stock Exchange Composite Index, or JCI, is down about 7 percent this year, while the yield on the benchmark 10-year government bonds has rallied 158 points this year to the highest since January 2017.
4. What has the central bank done to stem the rout?
Bank Indonesia raised interest rates by a total of 100 basis points since May and intervened in both the currency and the bond market to curb losses, draining what was a record stockpile of foreign reserves in January by about $14 billion to $118 billion in July. The central bank has said it stands ready to respond to excessive market volatility and has maintained a hawkish monetary policy stance even though it kept the benchmark rate on hold in July. The impact of the Turkey crisis will weigh on the bank’s policy decision on Wednesday, and authorities have said they’re already intervening in the foreign-exchange market to stabilize the currency and are injecting more liquidity through swap auctions. The government is also doing its bit to shore up dollar supplies over the longer term: it plans to increase the use of palm-based biodiesel to cut fuel imports, promote tourism and boost exports.
5. Will it succeed?
The central bank says Indonesia’s economic fundamentals are better than many emerging market counterparts such as Argentina, Turkey and Russia, while analysts point to a generally stronger position for Asian emerging markets that makes them able to withstand external shocks better than global peers. But with the Fed set to continue raising interest rates and the spread between U.S. and emerging market yields narrowing, expect more currency weakness, which will only get worse if the slump in the lira develops into a full-blown financial crisis in Turkey.
6. Hasn’t this happened before?
In the so-called “taper tantrum” of 2013, when the Fed first raised the idea of withdrawing stimulus, the rupiah was one of the hardest-hit currencies in Asia, dropping more than 25 percent against the dollar that year. Finance Minister Sri Mulyani Indrawati has been at pains to point out the economy is in a stronger position than it was in 2013, given bigger foreign reserves and lower inflation. Indeed, Moody’s Investors Service upgraded Indonesia in April citing steps taken to improve the economy’s resilience to global shocks.
--With assistance from Tomoko Yamazaki.
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