JAKARTA- A decade ago Indonesia earned the unwelcome label of being among the so-called “Fragile Five” emerging markets, economies highly vulnerable to capital outflows and a currency slump whenever global interest rates rise.
But fast forward to a new round of monetary tightening led by the US Federal Reserve, Southeast Asia’s biggest economy and its capital markets have shown remarkable resilience, throwing a spotlight on whether the situation has fundamentally changed.
Indonesia’s central bank is among the world’s least hawkish, having given no hint of when it might lift rates, while inflation has only just nudged above the 2 percent-4 percent target range and the rupiah is one of emerging Asia’s best performing currencies.
This contrasts with 2013, when the Fed’s mere mention of plans to taper stimulus triggered destabilizing capital outflows that saw the rupiah drop 20 percent, forcing Bank Indonesia (BI) to hike rates by 175 basis points.
“In Indonesia… there has been no year-to-date increase in the policy rate. Now that’s extremely rare,” Ivan Tan, ratings agency S&P’s financial institutions analyst, told a seminar last week.
Notwithstanding some political risks, Indonesia does appear to be weathering economic conditions better than the others lumped in the Fragile Five – India, Turkey, South Africa and Brazil.
Policymakers say they have learnt lessons from past crises and devised policies such as setting up a domestic non-deliverable forward foreign exchange market, promoting greater use of other currencies in trade and investment rather than the US dollar and selling more bonds to local investors to avoid over-reliance on foreign hot money.
While there is debate about how much these policies have helped, analysts agree record-high exports amid a global commodity boom have helped Indonesia shore up its economic resilience.
