Indeed, Indonesia is typically among the most vulnerable emerging markets in Asia when there occurs global turmoil. The country runs a wide (and structural) current account deficit which implies that it depends on foreign investment (which plunges in times of global turmoil), while its foreign exchange reserves (as a percentage of GDP) are relatively low (meaning it has less resources at its disposal to intervene in the currency market compared to regional peers).

However, what seems to be an additional factor in the ongoing novel coronavirus (COVID-19) outbreak is that market participants seriously doubt whether the Indonesian government can handle the situation. At the time of writing the official number of (confirmed) coronavirus infections in Indonesia is 309. However, there is some serious concern that this number will rise exponentially in the period ahead. Considering Indonesia's healthcare sector is underdeveloped this would cause huge problems.


Moreover, in case Indonesia will need to impose a full lockdown in order to combat the virus, then the economy will be hit very hard, resulting in the bankruptcy of many companies (as the government has limited funds at its disposal to support all tens of millions of micro, small and medium-sized enterprises). This could result in a social crisis. Earlier this week the Indonesian government urged all Indonesians who are currently abroad to come back home. This could be a signal that borders will close soon.

Meanwhile, the Indonesian rupiah rate touched its weakest level (versus the US dollar) since the Asian Financial Crisis in 1998-1999. For many Indonesians it is scary to see the rupiah pass beyond the IDR 16,000 per US dollar level with the traumatic experiences of the Asian Financial Crisis still fresh in mind. In this situation Indonesians may prefer to withdraw money from their bank accounts and/or change it for US dollars, thereby putting additional pressure on the country's banking sector and the rupiah.


Indonesian Rupiah versus US Dollar (Bank Indonesia's JISDOR Rate):

| Source: Bank Indonesia


In the March 2020 monthly update Indonesia Investments will discuss this loss of confidence in Indonesian assets in great detail. This report is scheduled to be released on 7 April 2020.


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