Rupiah Falls to Asian Crisis Low as Emerging Market Pain Spreads

(Bloomberg) -- Indonesia’s rupiah slid to a two-decade low, spurring intervention from the central bank as the meltdown in Argentina and Turkey raises scrutiny on emerging markets with current account deficits.

The rupiah fell to 14,750 per dollar, the weakest level since the 1998 Asian financial crisis, while the benchmark bond yields advanced 10 basis points to the highest level since 2016. The Jakarta Composite Index slipped as much as 1.3 percent.

“The rupiah’s underperformance relative to the rest of emerging markets stems from Indonesia’s weak external payments position, especially the current account deficit,” said Prakash Sakpal, Singapore-based economist at ING Groep NV. Still, “things now are far different than 20 years ago when the crisis originated in Asia and rupiah’s external creditworthiness was much weaker.”

As investors dumped Turkish and Argentinian assets, countries with large current-account deficits such as Indonesia and India have also seen their currencies and bonds come under selling pressure. The rout in the Argentinian peso and Turkish lira end the recent stability bought by Bank Indonesia’s four rate hikes since mid-May, which has led to a return of foreign funds into its debt market.

The recent sell-off will put more pressure on the central bank to raise rates again, according to Bank of America Merrill Lynch.

"Just goes to show the external environment remains tough for Indonesia as we had anticipated," said Mohamed Faiz Nagutha, an economist at Bank of America Merrill Lynch in Singapore. "We continue to expect more hikes for sure, with the exact magnitude to be determined by external rather than domestic fundamentals."

Intervention

The central bank is intervening in the foreign exchange and bond markets, according to Nanang Hendarsah, executive director for monetary management.

The rupiah is down 7.8 percent this year, and first came under pressure from a resurgent greenback and climbing U.S. Treasury yields. The escalating trade war between the U.S. and China, followed by the Turkey turmoil then added to its woes. It’s the second-worst performing major Asian currency this year, after the Indian rupee.

The rupee also fell to a new record low, trading 71.035 against the dollar. It is set for the biggest monthly decline in three years.

EM Spillover

“The spillover from the resurfacing emerging-market turmoil in the Argentina peso and Turkish lira is weighing on EM Asia currencies,” said Ken Cheung, senior FX strategist at Mizuho Bank Ltd. in Singapore. “There was no solid relief sign for the China-U.S. trade tensions, and the upcoming U.S. tariff plan on $200 billion of Chinese goods, after the public-comment period due next week, could jeopardize sentiment.”

The rupiah’s slide has added to Indonesia’s current-account deficit. The shortfall increased to $8 billion in the second quarter, or 3 percent of gross domestic product, from $5.7 billion in the previous three months, according to the latest central bank data.

“For Indonesia, it’s the current-account deficit that we need to manage,” said Suahasil Nazara, head of fiscal policy office at the Finance Ministry. “The ultimate fix is through our structural reforms, allowing better and more conducive business environment especially for manufacturing and upstream industries.”

Investors including Western Asset Management Co. said recently there were buying opportunities in Indonesian bonds, given the sound domestic fundamentals and a proactive central bank. With foreigners owning almost 40 percent of the nation’s bonds, Indonesia is particularly vulnerable to jitters in global markets.

Indonesia Blazing Policy Trail for Vulnerable Emerging Markets

Despite the rupiah’s selloff, investors can take heart in “some underlying improvement in the Indonesian economy” since the 1998 Asian crisis, said Michael Every, head of financial markets research for Rabobank Group in Hong Kong. “I don’t think there’s as much downside risk to the rupiah until we see China devalues its currency significantly,” he said.

--With assistance from Rieka Rahadiana and Subhadip Sircar.

To contact the reporters on this story: Ruth Carson in Sydney at rliew6@bloomberg.net;Karlis Salna in Jakarta at ksalna@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net;Thomas Kutty Abraham at tabraham4@bloomberg.net

©2018 Bloomberg L.P.