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Indonesia ETFs Are Vulnerable as EM Risk Sentiment Escalates

This article was originally published on ETFTrends.com.

Indonesia country-specific ETFs plunged Wednesday on an intensifying rout in the emerging markets, with Indonesia's equity market experiencing its worst sell-off in almost two years, forcing authorities to step in to support its local currency and debt markets.

On Wednesday, the iShares MSCI Indonesia ETF (EIDO) declined 4.7% and VanEck Vectors Indonesia Index ETF (IDX) decreased 4.0%, trading near their lowest level since July 2016.

President Joko Widodo blamed “a barrage of external factors” for the rupiah currency's depreciation to 20-year lows and argued for an immediate increase in investment and exports to contain the current account deficit, Reuters reports.

“There are only two key (things) - investments must continue to increase and exports must also increase so (we) can resolve the current account deficit,” Widodo said in comments posted on the cabinet secretary’s web page.

Bank Indonesia (BI) warned that while Indonesia’s current account deficit was 1.7% of gross domestic product last year, it is expected to widen to 2.5% in 2018.

Southeast Asian Markets Pummeled

The southeast Asian market was pummeled especially hard as investors exited emerging markets, due to the country's perceived vulnerability from its reliance on global trade with its current account deficit and need to import oil. For instance, Rob Carnell, head of research for Asia at ING, argued Indonesia is the most obvious target to dump in Asia during an emerging-market selloff because of the country’s dollar debts and its current-account deficit, the Wall Street Journal reports.

Indonesia is “the nearest we’ve got to an Argentina or South Africa or Turkey in the region, although I’d stress they’re considerably stronger than any of those countries,” Carnell told the WSJ.

“An off-cycle BI rate hike is possible to support the rupiah,” Maximillian Lin, an emerging-markets Asia strategist at NatWest Markets, told Bloomberg. “The rupiah is still the most vulnerable among Asian currencies when the dollar strengthens and EM risk sentiment deteriorates.”

In response to the steep selling, Bank Indonesia said it had sold dollars and bought government bonds. Nanang Hendarsah, head of monetary management at Bank Indonesia, said they “decisively intervened” in the foreign exchange and bond markets on to “smooth volatility” of the rupiah.

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