Why The Indonesian Stock Market Is Cratering

Business Insider

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indonesian rupiah

Reuters/Edgar Su

Indonesia's stocks got whipped on Monday, falling 5%. The Indonesian rupiah also took a beating falling to 10,500 per dollar, for the first time since 2009.

Year-to-date the rupiah is down nearly 7.7% against the greenback.

And the Jakarta Composite is the worst-performing stock index in the world this quarter.

One of the major reasons for the weak currency has been the expanding current account deficit. On Friday, the Bank of Indonesia announced that the current account deficit widened to $9.8 billion or 4.4% of GDP in Q2, from 2.4% in Q1.

And this has in large part been driven by the slowdown in commodity prices for crucial exports like palm oil and coal. From the Bank of Indonesia:

"Non-oil & gas trade surplus narrowed as imports, especially imports of raw materials and consumption goods, increased in relation to Q2 domestic consumption that historically was always higher than Q1. On the contrary, improvement in non-oil & gas export performance was hampered by declining commodity prices in the international market due to China economic slow down [emphasis ours]. The services account deficit widened due to increased payments for transportation of goods in line with imports and more residents traveling abroad during the school holidays. In the same period, the income account deficit also widened as foreign debt interest payments and profit transfers to foreign investors increased in accordance with schedules. Meanwhile, oil and gas trade deficit eased compared to the previous quarter."

Large current account deficits will only weaken its currency further. And if Indonesia's currency weakens, it would have to pay more for its imports and this could hurt growth.

This chart from FRED shows the deterioration in Indonesia's current account balance over the last five years:

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indonesia current account balance

FRED

Indonesia has also been hurt by slower growth. Q2 GDP fell to 5.8%, and this was the fourth straight quarter of slowing growth. Here's a look at the pace of growth over the past five years:

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indonesia gdp

FRED

Indonesia's central bank announced a surprise rate hike in June, at a time when other global central banks were easing. The hike was attributed to the pressures on its currency and rising inflation. Consumer prices were up 8.6% year-over-year in July. Indonesia also cut fuel subsidies despite widespread anger in an effort to support the rupiah. And with presidential elections due in 2014, investors continue to be wary of investing in Indonesia.

India faces a similar problem, with a wide current account gap and slowing growth weighing on the currency. Morgan Stanley identifies both the Indonesian rupiah and the Indian rupee as two of the fragile five currencies (the other three are the Brazilian real, the Turkish lira, and the South African rand.)

"The EM currency bear market that has been in place for the past two years is likely to continue over the medium term, as the factors supporting BoP flows over the last decade continue to unwind," Morgan Stanley analysts wrote in an August 5 note.

"Currencies will likely be held back by high inflation, large current account deficits, challenging capital flow prospects and potentially weak EM growth. The prospective normalization of Fed monetary policy simply exacerbates these underlying fundamental weaknesses. BRL, IDR, INR, TRY and ZAR will likely remain under medium-term pressure."



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