Indonesia’s record current-account deficit will drive away foreign investors and add pressure on the rupiah, the worst-performing currency in Asia since the beginning of June, according to Nomura Holdings Inc.
The CHART OF THE DAY tracks Indonesia’s current-account balance as a percentage of gross domestic product and the rupiah versus the dollar. The currency has weakened 13.9 percent since the start of June, compared with the 10 percent drop in India’s rupee, to be the worst performer in Asia during the period.
Bank Indonesia has embarked on its most aggressive tightening since 2005, joining Brazil and India in taking steps to support their currencies as the prospect of reduced U.S. monetary stimulus prompts investors to sell emerging-market assets. Indonesia’s foreign-exchange reserves have declined as the central bank defended the rupiah, while bondholders are demanding higher yields to hold its debt.
“The current-account deficit is the main factor in the rupiah’s decline, not just from its direct impact on foreign-exchange supply but also from the confidence channel,” said Euben Paracuelles, a Singapore-based economist at a unit of Japan’s largest brokerage. “Nomura forecasts the deficit to narrow in second half of 2013, but it is the capital outflows amid Fed tapering concerns that could be more dominant for the rupiah.”
Indonesia sold $1.5 billion of dollar-denominated Islamic bonds this month at the highest yield since 2009; its reserves are near the lowest level in almost three years; and foreigners have pulled out $2.66 billion from local equities since the start of June. The trade deficit widened to a record in July as an export slump extended to a 16th month, while the expanding middle class increased purchases of manufactured goods and fuel.
“The need to defend the currency while also improving the current-account deficit leaves the country with one option -- to raise interest rates,” Credit Suisse Group AG said in a Sept. 13 report, with Indonesia more vulnerable to tapering than Thailand or the Philippines. “Higher rates can attract more bond flows, enhance investor confidence in the country’s commitment to defend the currency and cut the current-account deficit by reducing aggregate demand and slowing imports. The sad result is higher discount rates for stocks and slower growth.”