Don't Cry for Indonesia's Rupiah. This Is No Argentine Lament

(Bloomberg) -- Complacency is an emerging-market investor’s worst enemy. Now that Argentina and Turkey are in trouble again, traders who piled into the currencies of developing nations earlier this year are starting to ponder: Who’s next?

Argentina has asked the International Monetary Fund for a $30 billion credit line to help stem a plunge in the peso, Pablo Gonzalez and Andrew Mayeda of Bloomberg News reported overnight Tuesday. The currency is down 17 percent against the dollar year-to-date. Meanwhile, Turkey’s lira has dropped to a record low ahead of a landmark election next month that could end a century of parliamentary rule.

In Asia, the finger has naturally pointed to Indonesia — one of the “fragile five” named by Morgan Stanley as the most vulnerable to external shocks amid the 2013 taper tantrum. The rupiah has weakened past the psychologically important 14,000 level, which may force Bank Indonesia to raise interest rates next week.

Don't Cry for Indonesia's Rupiah. This Is No Argentine Lament

Indonesia has had a rocky relationship with foreign financiers. JPMorgan Chase & Co. was only recently allowed to deal in the country’s sovereign bonds again, more than a year after a ban that followed its research team’s downgrade of Indonesian stocks.

Authorities could be forgiven for feeling sensitive. On a real effective exchange rate basis, the rupiah isn’t expensive, data from Renaissance Capital show. Meanwhile, one-year local-currency government bonds yield an attractive 5.4 percent.

Don't Cry for Indonesia's Rupiah. This Is No Argentine Lament

If any currency in Asian emerging markets looks expensive, it’s the Chinese yuan. However, no short sellers are willing to attack the currency, which is backed by $3.1 trillion in foreign reserves. They’d rather pick on the smaller guys.

Positioning is a factor. The U.S. dollar started the year weak, prompting global investors to rush in. They started the second quarter 10 percent overweight in emerging-market currencies, Morgan Stanley estimates.

Don't Cry for Indonesia's Rupiah. This Is No Argentine Lament

Once the greenback started to rally and U.S. Treasury yields rose, investors had little choice but to reduce risk and return to benchmark exposure. With foreigners owning about a third of Indonesia’s bonds, the market was bound to suffer.

Bad times also encourage investors to focus on negatives. The Turkish lira is arguably one of the cheapest emerging-market currencies – but the country also runs a 5.4 percent current account deficit. Indonesia’s deficit, by contrast, is expected to widen to 1.9 percent this year from 1.7 percent, according to IMF estimates. 

Sellers may argue that the nation hasn’t thoroughly cleaned house. The government of Joko Widodo in March instructed ministers to keep fuel prices stable over the next two years, effectively retaining a subsidy that will be an even bigger drag on public finances as oil prices climb.

To be sure, Indonesia’s risk premium — measured by five-year credit default swaps — hasn’t risen to the levels seen after Donald Trump’s surprise election win in November 2016. So there’s no need to call out the entire fire department yet.

But when a house catches fire, it’s often because some part of the structure isn’t sound. In this case, the owner should reflect, rather than blaming those who sound the alarm.

To contact the author of this story: Shuli Ren at

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