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Has Indonesia shed its reputation as one of the most "fragile" emerging markets?

Image: Reuters Berita 24 English - The unfavourable designation of being one of the "Fragile Five" developing markets—economies th...

Image: Reuters

Berita 24 English - The unfavourable designation of being one of the "Fragile Five" developing markets—economies that are more susceptible to capital flight and currency declines whenever global interest rates rise—was bestowed upon Indonesia a decade ago.

But as the U.S. Federal Reserve has begun a new round of monetary tightening, Southeast Asia's largest economy and its capital markets have exhibited extraordinary resilience, raising the question of whether the situation has fundamentally changed.

The rupiah is one of emerging Asia's best performing currencies, and Indonesia's central bank is among the least hawkish in the world, having made no indication of when it could raise rates. Inflation has only just risen above the 2 percent to 4 percent target range.

This is in contrast to 2013, when the Fed's mere suggestion of plans to reduce support sparked unsettling capital flight that caused the rupiah to plunge by 20% and necessitated a 175 basis point rate increase from Bank Indonesia (BI).

"The policy rate in Indonesia has not increased thus far this year. That's really uncommon, "Last week, Ivan Tan, an analyst for S&P's financial institutions division, spoke at a seminar.

Despite some political dangers, Indonesia does seem to be handling economic hardships better than the other countries grouped together as the Fragile Five—India, Turkey, South Africa, and Brazil.

The establishment of a domestic non-deliverable forward foreign exchange market, encouraging the use of other currencies other than the U.S. dollar in trade and investment, and selling more bonds to local investors to avoid an over-reliance on foreign hot money are just a few of the policies that policymakers claim they have learned from previous crises.

While there is disagreement over the extent to which these measures have been beneficial, observers concur that record-high exports during a boom in global commodities have strengthened Indonesia's economy.

As a net exporter of commodities, Indonesia advantages because "it is in a very excellent position to control some of the supply side inflationary pressures that some other countries are battling with," according to S&P's Tan.

In addition to assisting the resource-rich nation to record current account surpluses, this has also assisted the government in lowering bond sale goals and funding energy subsidies to protect its 270 million inhabitants from rising international oil prices.

Moreover, after having Southeast Asia's busiest IPO schedules last year, Indonesia's stock market is up by more than 5% year to date compared to declines in other significant Asian equity markets.

By 2045, when Indonesia will celebrate its 100th anniversary of independence, it hopes that financial market stability would enable the economy to grow by at least 6 percent annually. One of Indonesia's long-term goals is to treat more of its abundant mineral resources, particularly nickel ore, domestically.

BI According to Governor Perry Warjiyo, Indonesia's external balance will change as a result of the government's emphasis on advancing the commodities processing chain, which will also diversify exports and enhance capital flows with foreign direct investment.

"The total balance of payments will record a surplus for the entire year, and the (current account) deficit will be modest. This indicates that the underlying supply of foreign currency is high and will support the stability of the rupiah exchange rate "At the most recent BI policy meeting, Warjiyo remarked.


Political dangers to several of President Joko Widodo's important policies and longer-term goals of making Indonesia a wealthy country by 2045 cast a shadow over the country's current success.

These include the European Union's complaints to Indonesia's prohibition on nickel exports and a judicial challenge to his signature Job Creation law, which aims to reduce red tape.

With the Fed still anticipated to aggressively hike rates further, commodities prices dropping, and prospects of a global recession looming, concerns still persist regarding Indonesia's stability.

According to Thomas Rookmaaker, head of Asia-Pacific sovereigns at Fitch Ratings, much of (Indonesia's) progress "looks of ephemeral nature."

Fitch, which last week confirmed Indonesia's investment grade ratings, anticipates BI will raise interest rates by 50 basis points this year and another 100 in 2023 to reduce the rate disparity with the US and prevent a significant depreciation of the rupiah, he added.

In light of the global monetary tightening, S&P's Tan predicts pressures on the rupiah this year.

However, some experts do not believe BI is in a rush to raise rates because core inflation is so low.

Exports should be solid for a long, according to Damhuri Nasution, an economist at BNI Securities, providing BI time to concentrate on growth and keep an eye on recession threats.

Some foreign investors are supporting Indonesia's economic narrative in the meantime.

Nick Payne, global developing markets head at Jupiter Asset Management, is overweight Indonesian stocks and believes the country will continue to recover from the pandemic.

Payne predicted a protracted era of high growth for corporate earnings in comments sent via email. "Modest inflation, a good current account position, and strong commodity prices, all help to the stability of the rupiah amid the current difficult global environment," he added.

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