According to Morgan Stanley, the rupiah and ringgit are bound to outperform emerging market peers, while these developing economies will probably not experience the same amount of capital outflows that emerged when the US Federal Reserve announced in 2013 it was planning to wind down its massive quantitative easing program (taper tantrum). Back then, around USD $70 billion was pulled from both countries’ bond markets due to looming US monetary tightening. According to Jens Nystedt, Managing Director at Morgan Stanley Investment Firm, the ringgit is considered the cheapest from Morgan Stanley’s medium-based foreign exchange modelling in emerging markets. Indonesia’s rupiah comes in second place.

Although a Fed Fund Rate hike, which is the main topic of discussion at the Federal Open Market Committee meeting (16-17 September), will most likely result in capital outflows from emerging markets, including Malaysia and Indonesia, the impact will only be temporary as investors will not be surprised by the hike and, instead, feel relieved by an end of uncertainty about the timing of higher US interest rates. Many investors have already responded to the looming hike evidenced by persistent ringgit and rupiah weakness over the past year.

Morgan Stanley is also positive about Indonesia’s shrinking current account deficit and therefore Southeast Asia’s largest economy is candidate to exit the ‘fragile five’ list (containing the countries that are most vulnerable to global turmoil, i.e. Brazil, Turkey, South Africa, India and Indonesia). Based on data from Bank Indonesia Indonesia’s current account deficit narrowed to USD $4.48 billion, or 2.1 percent of gross domestic product (GDP), in the second quarter of 2015. As can be seen in the table below, this figure is much lower than the deficit posted in the second quarters of 2013 and 2014. However, it should be stressed that Indonesia’s improving trade and current account balances are particularly caused by declining imports, indicating that domestic economic activity has slowed.

Current Account Balance Indonesia (in million USD):

Regarding the Fed Fund Rate, Morgan Stanley expects a 25 basis points hike before the end of the year as the US central bank will probably take a “dovish” approach amid sluggish global economic growth. If the Fed decides to postpone the hike until October, then Morgan Stanley expects to see short-term relief to markets.

Although most Asian currencies strengthened against the US dollar on Thursday (17/09) due to weak US inflation data dampening expectation of an US interest rate hike, the rupiah continued to weaken. Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) hit a fresh 17-year low as it depreciated 0.07 percent to IDR 14,452 per US dollar, and depreciated 0.30 percent to 16,348 per euro.

Indonesian Rupiah versus US Dollar and Euro:

| Source: Bank Indonesia


When will the Federal Reserve raise its Fed Fund Rate?

Voting possible:  -


  • Next Year (39.2%)
  • In December (36.5%)
  • In October (12.2%)
  • I don't know (12.2%)

Total amount of votes: 181