Racing A Thunderstorm: Indonesia’s Fifth Rate Hike Since May Underscores EM Fed Angst

Well, you can’t say Bank Indonesia isn’t trying.

On Thursday, BI hiked rates for a fifth time since May, the latest in a series of increasingly frantic efforts to shore up the rupiah in the face of the Fed’s tightening cycle.

Simply put, these hikes aren’t working:

(Bloomberg)

Although acute crises in Turkey and Argentina have grabbed all the headlines this year, the Indonesia story is important.

Ostensibly, the central bank is doing the “right” thing and Governor Perry Warjiyo is clearly attune to the dangers inherent in sitting on one’s hands while the Fed hikes rates. But five rate hikes since May and round after round of intervention have been insufficient to stabilize the rupiah, which is still hovering near its weakest levels since 1998.

Indonesia is vulnerable in a classic sense. They’re running a current account deficit at a time when the dynamics that pushed investors out the risk curve and into emerging market assets are reversing. The tide is going out and countries that rely on external funding will need to work hard to ensure their markets remain attractive to foreign investors when things like, for instance, short-dated USD fixed income, are offering some semblance of “attractive” yield again.

As of July, foreign bond ownership in Indonesia was nearly 38% of outstanding.

The problem with that in an environment where the global hunt for yield is reversing on the back of Fed tightening is that it sets up a potential exodus. Last month, Indonesia’s Finance Ministry said it’s aiming to reduce the amount of sovereign debt owned by offshore accounts by nearly half, to 20% from the 38% shown above. That’s an effort to make the country less vulnerable to episodes like what’s going on right now.

In addition to the multiple measures BI has rolled out in an effort to stem currency weakness, the central bank is launching NDFs, providing companies with a hopefully useful hedging tool for their dollar exposure.