Indonesia, one of five “fragile” emerging markets, looks stronger now

IN RECENT weeks signs have appeared in the poky arrivals hall at Soekarno-Hatta airport in Jakarta, Indonesia’s capital, exhorting visitors to shun the dollar in the name of national sovereignty. “Use rupiah for all transactions in Indonesia!” travellers are told, as they wait, interminably, at the luggage carousels. That reflects old suspicions of foreign interference in the economy, South-East Asia’s largest, coupled with newer concerns about the currency’s vulnerability to capital flight.

In 2013, when the Federal Reserve’s “tapering” of its asset purchases led to a 21% slide in the rupiah against the dollar, Indonesia was seen as one of the “fragile five” emerging markets. Of late, anxieties have resurfaced. On December 14th the Fed raised interest rates for the first time in a year. More rises are expected this year. Higher yields in advanced economies draw capital from emerging markets, putting pressure on their currencies. The rupiah fell by 3.7% against the dollar in November, the steepest monthly decline for more than a year, as part of a wider sell-off of emerging-market currencies.

This partly explains why Indonesian officials are so prickly. On January 3rd the finance ministry severed all business ties with J.P. Morgan, after the American investment bank downgraded its view of Indonesian equities to “underweight” following Donald Trump’s election victory. Sri Mulyani Indrawati, the finance minister, said that financial institutions have a responsibility to create positive sentiment. On January 16th J.P. Morgan partially backtracked, shifting to a “neutral” stance and saying the post-election volatility it had feared had “played out”.

It is not the first time Indonesian officials have penalised banks for their research. In 2015 Bambang Brodjonegoro, Ms Mulyani’s predecessor, memorably told J.P. Morgan analysts responsible for a similarly critical note to do 100 press-ups. Ms Mulyani, however, is widely regarded as the cabinet’s most pro-market member, following a previous, reformist stint as finance minister in 2005-10. Markets rallied when the president, Joko Widodo, brought her back in a reshuffle last July. So her actions took observers aback.

Indonesia relies on foreign capital to finance a current-account deficit (see chart). Foreign reserves amount to a hefty $116bn, but are among the lowest in Asia relative to the economy’s overall financing needs. Foreigners hold nearly 40% of Indonesia’s local-currency bonds. So it is vulnerable to souring sentiment.

Still, the economy seems better placed to withstand shocks than a few years ago. The trade surplus rose to $8.8bn last year, the highest level since 2011. Exports are recovering rapidly, boosted by higher prices for coal and other commodities. At 1.8% of GDP, in the most recent quarter the current-account deficit is less than half what it was in 2013. External debt is relatively low.

Alarmist signs at the airport and lashing out at banks for their research tend to bury rather than highlight such positive indicators. Not for the first time, Indonesian nervousness risks making the country appear weaker than it actually is.