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Foreign Investors Are to Blame for Indonesia ETFs’ Sudden Fall

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This article was originally published on ETFTrends.com.

Indonesia's markets and country-specific ETFs have been among the worst performers in the emerging markets category as foreign investors pull capital out of the country.

The iShares MSCI Indonesia ETF (EIDO) declined 13.6% and Market Vectors Indonesia Index ETF (IDX) decreased 12.4% year-to-date.

The Indonesian equity market has slipped more than 8% in two weeks while the rupiah currency depreciated 1.4% since mid-April as global investors yanked funds from emerging markets, the Wall Street Journal reports. Overseas investors hold around 40% of all Indonesian local-currency government bonds, compared to 18% a decade ago, making this emerging market one of the most sensitive to global changes.

“Foreign ownership in government bonds is positive because it shows foreigners’ confidence on our economic fundamentals,” Luky Alfirman, director-general of financing and risk management at Indonesia’s Finance Ministry, told the WSJ. “But it also creates risk of vulnerability. Because of that, the government’s focus is on how to mitigate the risk.”

The sell-off is partially attributed to the ripple effects from Indonesia's local-currency debt market, which up until recently has benefited from investors' search for yield in a low-yield environment.

Since mid-April, about $2 billion in foreign money has flowed out of rupiah-denominated debt in part of a global trend for capital returning to U.S. markets as investors look to rising bond yields and a stronger dollar.

The sell-off in local bonds has also created a spiral effect for U.S. dollars as investors convert proceeds, weakening the rupiah currency against the U.S. dollar. Meanwhile, foreign investors typically sell down Indonesian equities when the rupiah weakens since local company earnings become less attractive in dollar terms.

Over the past two weeks, foreigners have dumped almost $600 million in local equities. EIDO also experienced about $43 million in outflows over the past two weeks.

Despite the changes in the global dynamics, Indonesia's economy shows strong fundamentals with robust economic growth. The economy expanded 5.1% in the first quarter of 2018, the same growth rate for all of 2017, which was also its best annual performance since 2013.

For more information on the Indonesian market, visit our Indonesia category.

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