Indonesia’s shrinking current-account deficit has turned the rupiah into the world’s best-performing emerging-market currency this year, after it weakened in 2013 by more than any other peer apart from Argentina’s peso.
The shortfall in the broadest measure of trade was 1.98 percent of gross domestic product in the fourth quarter, down from 3.8 percent in the previous three months and a record 4.4 percent in the second quarter, the central bank reported yesterday as it left interest rates unchanged. The data spurred a 2.2 percent two-day gain in the rupiah to 11,825 per dollar in Jakarta, extending this week’s jump to 2.8 percent, the most since June 2009, prices from local banks show.
Global funds have pumped more than $1 billion into Indonesia’s stocks and bonds in 2014 as the country reported December’s trade surplus was the biggest in more than two years. Maybank and Morgan Stanley predict further rupiah appreciation if Jakarta Governor Joko Widodo, known locally as Jokowi, wins a July presidential election. He is currently topping voter surveys after announcing plans to clamp down on tax evasion and pushing ahead with stalled transport projects.
“The risk in the Indonesian rupiah has eased as the current-account deficit is narrowing,” Joey Cuyegkeng, an economist at ING Groep NV in Manila, said yesterday. “Political uncertainty has also eased because the front-runner is a reform-minded candidate.”
The rupiah surged 1.4 percent today as of 4:21 p.m. and touched 11,823, the strongest level since Dec. 3, prices from local banks show. It has rallied 2.9 percent this year.
In the last two weeks, Morgan Stanley forecast a Jokowi victory would strengthen the rupiah to 11,800 by year-end and Maybank predicted an advance to 11,300. The U.S. bank, which included the rupiah last year in a “fragile five” list of emerging-market currencies that were vulnerable to outflows because of weak external positions, boosted its stance on Indonesian shares in January, citing low valuations.
The rupiah plunged 21 percent in 2013, the most in 13 years. The other “fragile five” currencies, India’s rupee, Turkey’s lira, Brazil’s real and South Africa’s rand are down between 0.7 and 4.2 percent against the dollar this year.
Indonesia’s exports increased 10.3 percent in December from a year earlier, the most since October 2011, official data showed Feb. 3. Coupled with an 0.8 percent decline in imports, that widened the trade excess to $1.5 billion.
Foreign funds bought 8.69 trillion rupiah ($735 million) more local-currency debt than they sold this year through Feb. 11, finance ministry data show. They had pumped $379 million into local stocks as of yesterday, making Indonesia the only one of eight Asian markets tracked by Bloomberg to see share inflows this year. The Jakarta Composite index has risen 5.5 percent in 2014, leading gains among benchmark gauges in Southeast Asia’s five biggest stock markets.
“The flows were driven by the improvement in our economic numbers,” said Arief Wana, a Jakarta-based managing partner at PT Ashmore Asset Management Indonesia, a unit of Ashmore Group that manages $75.3 billion. “Investors are also betting that Jokowi will run for president.”
The yield on Indonesia’s 10-year government bonds fell 12 basis points, or 0.12 percentage point, to 8.66 percent today, Inter Dealer Market Association data shows. The yield has dropped 38 basis points in February after surging 326 basis points last year amid speculation the Federal Reserve would cut monetary stimulus. The U.S. central bank has reduced its purchases of Treasuries and mortgage debt to $65 billion a month, from $85 billion last year.
“Indonesia was worst hit during the selloff last year, so we would expect inflows to rebound faster here than in other emerging markets as funds return to buy up cheaper assets,” Handy Yunianto, the Jakarta-based head of fixed-income research at PT Mandiri Sekuritas, a unit of the nation’s largest lender by assets, said yesterday. “Investors are more keen on equities as bonds delivered large losses last year.”
The current-account deficit was 3.26 percent of GDP for the whole of last year and may narrow to 2.5 percent this year and 2 percent in 2015, Bank Indonesia Deputy Governor Perry Warjiyo said yesterday. The monetary authority predicted inflation, which was 8.22 percent in January, would slow to 4.9 percent by the end of the year.
“The current account issue of last year now appears to be solved as it has narrowed to a sustainable level,” Nurul Eti Nurbaeti, head of treasury research at PT Bank Negara Indonesia in Jakarta, said yesterday. “With positive data from the domestic side and provided external factors remain conducive, we can see the rupiah continue its rally this quarter.”