Country risk: Indonesia is not heading the way of Argentina or Turkey

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By:
Jeremy Weltman
Published on:

The borrower is affected by currency turmoil and has its own problems to solve, but is still a safer prospect than numerous other EMs.

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In the portfolio basket, Indonesia is an egg less fragile than other emerging markets


The latest attack on emerging market (EM) currencies has left investors contemplating the worst, wondering which countries will be plunged into turmoil from capital flight precipitated by rising US interest rates, global trade wars and a wobbly Chinese currency.

Indonesia is a possibility in theory, if not in practice.                           

The rupiah has been sent lower mostly from contagion, forcing the central bank to tighten monetary policy by raising interest rates after FX market interventions.

The contagion admittedly is partly caused by country-specific concerns, including a rising level of debt, widening current-account deficit, and political factors with concurrent presidential and legislative elections coming into view in April 2019.

“[However], Indonesia’s external imbalance is less pronounced as in hard-hit countries like Argentina or Turkey,” says ABN Amro’s senior economist Arjen van Dijkhuizen in a recent report.

Dijkhuizen is one of 24 contributors to Euromoney’s Indonesia risk survey, which is regularly updated along with more than 180 other countries condensing the views of more than 400 participating economists and other risk experts.

His assertion is backed up by figures published by the IMF in its World Economic Outlook.

They show Argentina with a current-account deficit of 4.8% of GDP last year widening to 5.1% in 2018.

Remote prospect

Turkey’s is more than 5% for both years, while Indonesia’s is slightly less than 2%, and even if that proves incorrect the prospect of it going above 3% of GDP is remote. ABN Amro is predicting it will be 2.5% this year.

“Indonesia has plenty of vulnerabilities, but a large-scale crisis is not likely,” says Van Dijkhuizen, noting the fact Indonesia has solid investment-grade credit ratings.

Moody’s upgraded Indonesia’s sovereign rating in April from Baa3 to Baa2 (stable), matching a similar upgrade from Fitch to BBB (the Baa2 equivalent) in December, leaving S&P on BBB-.

Other survey contributors take a similar view, along with investor professionals contemplating the full impact of the crisis to hit Turkey.

The fact its external imbalances are less significant reflects pro-active government policies. Moreover, Indonesia’s FX reserves provide ample coverage of imports and short-term external debt maturities.

This resilience is reflected in Euromoney’s survey.

The country risk score has improved this year, extending a longer-term upward trend to place Indonesia in 57th position in the global rankings of 186 countries, above Turkey and almost level with Hungary:


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During the past five years, Indonesia’s risk factor scores for bank stability, monetary policy and employment have steadily increased. These are small, but discernible upward trends in the survey over time.

All of the political and structural risk factors included in the total risk score have improved too.

Many are still comparatively low-scoring, but the direction of change is what matters most. It explains why ECR predicted Indonesia would regain across-the-board investment grades.

Of course, the country is not immune to global developments. Trade wars, a crisis in China or a political shock could all have sudden and unpredictable effects.

Indonesia is succumbing to rising Islamist politics and there is naturally a temptation for populist budget spending ahead of the elections.

However, GDP growth prospects remain firm after the release of second-quarter national accounts beating expectations with a 5.3% year-on-year outturn.

That is the highest growth figure to date under the administration led by president Joko Widodo since he took over in 2014.

Concerns dampened

The growth figure has dampened concerns about the economy weighing on the currency, with stronger private consumption expenditure and services output.

Forecasts for GDP growth naturally vary, but a broad consensus is suggesting at least 5% for 2018, with inflation around 3.5% (10 percentage points less than in Turkey), the fiscal deficit narrowing to 2.5% of GDP and debt approximately 34% of GDP.

Indonesia has better fiscal, inflation and current-account indicators than India, too – with a lower-growth profile admittedly, but yet a fifth the population size.

The country is now the seventh-largest economy worldwide measured in purchasing power parity, and it will likely move into the top 10 based on market exchange rates by 2030.

The elections will be unsettling for sure, with the president facing once again the formidable challenge of former general Prabowo Subianto, running on the Gerindra party ticket, who is backed by former president Susilo Bambang Yudhoyono.

Widodo is perhaps the more likely victor given the strong showing for his party and allies in recent regional elections in Java, and the fact he is supported by four other parties, including Golkar supplying his running mate.

Indonesia needs higher growth for development, but its risk profile has improved over time, and it seems highly likely the country can ride out any short-term volatility.

This is down to the fact authorities have prioritized stability by limiting external borrowing, maintaining adequate reserves, ensuing bank stability and managing the current-account deficit.

This should serve the country well.