Friday, September 6, 2013

Update on Indonesia: 6 indicators of worsening situation

Here are the latest economic and financial indicators for Indonesia (see post), as financial conditions there continue to worsen.

1. The trade deficit has increased to the worst levels in Indonesia's recent history.
FT: - The gloom surrounding Indonesia continued to deepen on Monday after southeast Asia’s biggest economy posted a record monthly trade deficit and inflation climbed to a four-year high. The trade deficit jumped to $2.3bn in July, much higher than expected, as imports remained strong while exports shrank because of the slowdown in China and continuing troubles in Europe and the US.

2. The inflation rate, while low by historical standards, has picked up sharply and is expected to rise further.
FT: - Annual consumer price inflation rose to 8.8 per cent in August, from 8.6 per cent one month earlier, with economists predicting that inflation may reach double digits by the end of the year, putting pressure on the central bank to continue lifting interest rates at a time when economic growth is slowing.

3. One of the reasons for this acceleration in inflation rate has been the drastic devaluation of the nation's currency - about 18% this year alone. Inflation is to some extent driven by the government being forced to reduce subsidies, as imports become expensive.

Indonesian rupiah per one dollar (USD/IDR; source: Bloomberg)

4. The stock market looks amazingly similar to other emerging market indices, such as that of Turkey for example (see post). These markets had peaked around the time of Bernanke's key taper speech (see post).

Jakarta Stock Exchange Composite Index (JCI; source: Bloomberg)

5. The bond market is selling off in part because many if the government bond holders are foreigners. After touching 5% at the beginning of the year, the yield on Indonesia's 10yr government bond is now nearing 9%.


6. And finally here is the sovereign CDS spread. Again, Indonesia CDS doesn't trade much, but it is still a useful benchmark to track.

Source: DB

With this as a background, economists are beginning to talk about the risks of the 97-98 contagion crisis repeating itself.
Jakarta Post: - Asian countries are now “closer than ever” to another 1997-1998 crisis. Whether history will repeat itself largely depends on policymakers’ responses, according to a report by Singapore-based DBS Bank released on Thursday.

The report points to the recent capital outflow and slump in currencies and says that the region is “absolutely” headed for the 1997-1998 financial downturn all over again.

Although most Asian countries have strong external positions — which means that the region is still someway, at least five years, from an economic crisis similar to the 1990s — two specific countries stand out as exceptions.

“India and Indonesia need to be monitored. External balances of both countries have trended south for the past 10 years,” DBS Bank economists, led by David Carbon, wrote in the report.
Indonesia’s financial vulnerability was “moderately high” and the country needed to be watchful of multiplying risk in its banking sector, Bank of America Merrill Lynch wrote in its report on the possibility of a repeat Asian 1997-1998 financial crisis.

“Indonesia has had a moderate lending boomlet, and the bad debt cycle is likely next,” the US-based bank warned.

Update: Indonesia's foreign reserves have fallen below $100 bn.

Indonesia's net foreign reserves (source: Bloomberg)
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