Indonesian markets get hammered by EM contagion
JAKARTA: Asia’s fifth biggest economy saw its stock market walloped as investors girded for the possibility of more interest-rate hikes to safeguard Indonesia’s rupiah, which has fallen to its weakest since 1998.
The benchmark Jakarta Composite Index dropped 3.8% at the close, the biggest one-day slide since November 2016. The gauge is down 19% in dollar terms for the year so far, factoring in the slump in the rupiah against the US currency. Yields on two-year government bonds have surged more than 60 basis points this week.
“A chain reaction from Argentina and Turkey is coming to us,” said Norico Gaman, head of research at PT BNI Sekuritas in Jakarta. People are only looking at the nominal figures of the exchange rate, while ignoring the fact that our purchasing power is not fragile and has so far been unaffected. The negative sentiment on currencies has come into equities.”
The rupiah on Tuesday fell to its weakest level since Indonesia was embroiled in the Asian financial crisis in 1998, when it needed an IMF bailout. The country is by many metrics in much stronger shape now, with debt ratios that compare favourably with other major economies. On Friday, Standard Chartered Plc put it in the “low risk” category for leverage.
What does spark worries about South-East Asia’s biggest economy is its continuing current-account deficits, which – though modest by historical standards – mean it’s reliant on overseas financing. With worries about the Federal Reserve’s accelerating destruction of global liquidity through monetary tightening, and about trade wars, that’s put Indonesia in the bucket of vulnerable emerging markets.
Bank Indonesia has been aggressive in defending the nation’s currency through interventions and has increased the benchmark interest rate by 125 basis points since mid-May. Central bank governor Perry Warjiyo has vowed to take “pre-emptive” steps to counter a deepening rout in the currency, using language he’d adopted before to signal an interest-rate hike. Bank Indonesia might not wait to act on rates until the policy meeting scheduled for Sept 27, according to some analysts. It took such a step with an out-of-cycle hike on May 30. “An off-cycle BI rate hike is possible to support the rupiah,” said Maximillian Lin, an emerging-markets Asia strategist at NatWest Markets in Singapore.”
The rupiah is still the most vulnerable among Asian currencies when the dollar strengthens and EM risk sentiment deteriorates.