Opinion | Indonesia faces up to emerging market turbulence
Indonesia has been strengthening its resilience to external shocks, as it cannot be complacent as the global financial environment becomes even more troubled
The global environment is turning more hostile towards emerging markets. Indonesia cannot escape its consequences but can contain them.
An environment of rising bond yields, a stronger US dollar, elevated oil prices, and an ever more complicated geopolitical scene is not a kind one for emerging markets. Not surprisingly then, the past few weeks have seen emerging economy currencies such as the Argentinian peso, Turkish lira and Brazilian real depreciate sharply.
Looking ahead, countries such as Indonesia cannot be complacent as the global financial environment becomes even more troubled. The threat from depleting financial liquidity can only intensify as the US Federal Reserve pursues its tighter monetary policy. As available capital becomes scarcer, investors will become more rigorous in assessing and pricing risk. They will also be quicker to switch asset allocations in response to changing circumstances. The recent sharp spike in Italy’s certificates of deposit spreads and the abrupt corrections in equity markets across Europe show how global investors are now in a mood to sell down even a developed country at the first whiff of trouble.
Fortunately, Indonesia has strengthened its resilience to these kinds of shocks. In 2013, when then Fed chairman Ben Bernanke hinted that the Fed would soon start raising rates, there was a massive outflow of capital from emerging markets which were deemed to be at risk from such a policy tightening. Consequently, the Indonesian rupiah fell from 9,000 to 10,000 to the US dollar to above 13,000 in a few weeks. But it eventually regained most of the lost ground. In August 2015 when China’s surprise decision to adjust its exchange rate policy sent global markets into a tailspin, the rupiah held up well.
There are solid reasons Indonesia has become better able to absorb these emerging-market shocks.
First, the country’s external position being stronger, its perceived riskiness has improved. Its current account deficit as a share of its economy has nearly halved, from 3.2 per cent in 2013 to 1.7 per cent in 2017, giving comfort to investors. Foreign exchange reserves are also much larger, giving the country a bigger buffer than before. Moreover, foreign direct investment is rising, with foreign investment realisation up 11.5 per cent in the first quarter.