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Negative Economic Factors Plague Indonesia ETFs


Indonesia exchange traded funds have been among the worst performers in the emerging market category as both external and internal factors weigh on the economy, and some observers believe it could get worse next year.

The iShares MSCI Indonesia ETF (EIDO) has declined 25.5% this year and Market Vectors Indonesia Index ETF (IDX) is down 24.7% year-to-date.

Within Indonesia, flip-flopping public policies, corruption charges, widening disparity between the rich and poor, and surging inflation are pressuring the economy, writes Arno Maierbrugger for Investvine.

Moreover, the government implemented a protectionist policy, requiring foreign investors to reduce their stakes in mining operations within 10 years and capping foreign exposure in financial institutions.

The country’s growing current account deficit, depreciating currency and high external debt have also weighed on the market. The rupiah currency depreciated 20% since the start of 2013 and touched a 5-year low against the U.S. dollar as capital flight from Asia gained momentum on speculation of an end to easy money.

The depreciating rupiah has exacerbated losses in Indonesia investments, along with rupiah-denominated securities in the Indonesia ETFs. Foreign-currency denominated securities take a hit if their currency depreciates since the investment would be worth less when converted in to U.S. dollars.

Malaysian analyst Sam Chee Kong now believes that there is a “good chance” in 2014 that the Indonesia economy will be “heading for a perfect storm,” considering all the negative factors weighing on the economy. Additionally, Kong is concerned that the so-called storm could spread over to neighboring countries, which also display imbalances in both internal and external sectors.

iShares MSCI Indonesia ETF

For more information on Indonesia, visit our Indonesia category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.