Concerns over rising global yields, oil prices and slowing growth have driven the Indonesian rupiah to its weakest point in over two years, leading to a stocks and bonds sell off.
The rupiah hit its weakest level since December 2015 at 14,050 per US dollar, extending a three-month decline in which it lost more than 5 per cent of its value against the dollar, despite government intervention to support it.
The bond sales have Bank Indonesia caught between mounting pressure to raise rates and an economy that is failing to grow fast enough. An emerging market rout that started as US Treasury yields touched a four-year high last month has hurt Indonesia given its relatively open economy and the high foreign ownership of its assets.
The economy failed to meet expectations with growth of 5 per cent in the first quarter, as markets feared capital outflows from the high-yielding rupiah bond markets.
The stock market on Tuesday fell by 1.9 per cent to its weakest level in a year, while yields rose in the government bond market, 38 per cent of which is foreign-owned.
Foreign investors sold a net US$1.1 billion of sovereign bonds last month, on top of US$2.7 billion of stocks this year, Bloomberg reported.
The Ministry of Finance said it would not sell any bonds at an auction this week, saying investors asked for yields that were too high amid market volatility.
“There seems to be an increase in market anxiety after the rupiah breached the 14,000 threshold,” said Winson Phoon of Maybank Kim Eng Securities in Singapore. “BI is expected to continue to take measures to stabilise the financial market, and raising rate is one of the tools at their disposal. The bond market may be pricing in such an eventuality.”
Indonesia is not alone in contending with fickle foreign investors and debt sales from countries such as Russia have been cancelled or postponed, while the Argentinian central bank has increased interest rates three times in the last week to halt a currency slide.
“The market is responding to rising risks in Indonesia’s economy at a time when oil prices are climbing,” said economist Fakhrul Fulvian at Trimegah Securities.
Dhian Karyantono of Mirae Asset Sekuritas Indonesia said bond investors had been selling off Indonesian assets due to the rupiah’s slump and the credit default swaps, a contract for investors to eliminate potential loss from a sovereign’s default.
Indonesia’s economic growth has been disappointing by its high standards. Picture credit: Wikimedia
