Rupiah Leads Emerging-Market Losses in Worst Quarter Since 2008

Indonesia’s rupiah is leading declines in emerging markets this quarter, completing its worst three-month performance since 2008, as a record current-account deficit deterred investors. Government bonds fell.

The currency weakened 14 percent since the end of June to 11,580 per dollar as of 4:24 p.m. in Jakarta, the biggest loss among 24 developing-nation exchange rates tracked by Bloomberg. The rupiah fell 5.7 percent in September and 0.4 percent today.

The current-account gap will probably rise to 3.6 percent of gross domestic product this year, from 2.8 percent in 2012, according to Barclays Plc. While overseas investors sold a net $730 million of Indonesia stocks this quarter, they added 1.1 trillion rupiah ($96 million) to their sovereign debt holdings, the least since the second quarter of 2012, official data show.

“Weak confidence due to the sustained current-account deficit is the main factor,” said Gundy Cahyadi, a Singapore-based economist at DBS Group Holdings Ltd., Southeast Asia’s largest bank. “The current-account recovery will not be too significant until the first half of next year, so it will be difficult to see a rebound in the rupiah.”

One-month non-deliverable forwards declined 12 percent this quarter and 1.6 percent in September to 11,616 per dollar, 0.3 percent weaker than the onshore spot rate today after trading as much as 6.6 percent lower on Aug. 27. The contracts fell 1.5 percent today.

A daily fixing used to settle the forwards was set at 11,613 per dollar, compared with 9,981 at the end of June, according to the Association of Banks in Singapore. The reference was set 2.8 percent lower today, from 11,296 on Sept. 27, biggest drop since February 2009.

Trade, Inflation

Data tomorrow may show the trade deficit in Southeast Asia’s biggest economy narrowed to $2.1 billion last month, compared with a record $2.3 billion shortfall in July, according to an ING Groep NV research report today authored by Tim Condon, head of Asia research in Singapore.

“With softening domestic demand and associated import compression, we expect the current-account deficit to improve to 3.1 percent of GDP in 2014,” said Prakriti Sofat, an economist at Barclays Plc in Singapore. “The weakness in the rupiah is driven by the structural current-account deficit, concerns about policy management and global market volatility.”

One-month implied volatility in the rupiah, a measure of expected moves in the exchange rate used to price options, climbed 287 basis points, or 2.87 percentage points, to 17.01 percent this quarter, data compiled by Bloomberg show.

‘Negative Sentiment’

Indonesia’s trade deficit probably narrowed to $811 million in August, while inflation accelerated to 9 percent in September, from 8.8 percent last month, according to median estimates in Bloomberg surveys before reports due tomorrow. The central bank will announce foreign-reserves figures as soon as Oct. 3.

“Negative sentiment around these prints combined with risk aversion elsewhere in the world, should drive rupiah underperformance against the rest of the region,” Jonathan Cavenagh, a currency strategist at Westpac Banking Corp. in Singapore, wrote in a research note today.

Bank Indonesia has raised its benchmark interest rate four times this year, most recently by 25 basis points in September to 7.25 percent. The move is intended to accelerate the adjustment in the current account, according to a Sept. 12 statement from the central bank posted on its website.

Indonesia’s local-currency government bonds are the worst performers among 10 Asian debt indexes compiled by HSBC Holdings Plc this year with a loss of 12.7 percent.

The yield on the 5.625 percent notes due May 2023 climbed 138 basis points from June 30 to 8.51 percent and is up 332 basis points in 2013, prices from the Inter Dealer Market Association show. The rate rose for a third straight quarter, the longest stretch since the period ended June 2008, and advanced 12 basis points today.

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