You are here: Markets » Indonesia Upgrade Soon, But IDR Remains Hostage To Risk Appetite
by Win Thin
Moody’s put Indonesia’s rating on review for possible upgrade. This is a stronger statement than the June move to positive outlook on the Ba2 rating (equivalent to BB), and we think an upgrade will be seen soon. Indeed, the agencies are really behind the curve as our own sovereign ratings model has Indonesia at BBB+/Baa1/BBB+ compared to actual ratings of BB/Ba2/BB+. Fitch’s BB+ is the closest to our view amongst the three major US agencies, but all should be moved upward. Earlier this year, Japan Credit Rating Agency raised Indonesia’s foreign currency debt rating to investment grade BBB-. While JCRA moves usually don’t garner much attention, we think it is important given rising Japan investor interest in Indonesia.
We note that high yields and a policy rate of 6.5% coupled with strong economic fundamentals have made Indonesia one of the top investment destinations this past year, especially with the rest of Asia offering such low yields. That is slowly shifting as more and more Asian central banks hike rates, but Indonesia is starting off with a high yield advantage. While Indonesian officials have been quite dovish, market is looking for the first hike in Q1 of 25 bp. Recent inflation data supports the need for tightening, as November inflation came in at 6.3% y/y vs. 5.7% y/y in October. This is right near the cycle high of 6.4% y/y in August, and core CPI edged higher to 4.3% y/y from 4.2% y/y in October. The economy avoided recession and has been growing close to 6% so far in 2010 and so the output gap remains quite low.
IDR softened with the rest of EM in recent weeks, but we believe fundamentals remain strong and so the rupiah should do well when risk appetite returns. USD/IDR was unable to break the 200-day moving average this week around 9045, but the near-term outlook depends greatly on what the ECB delivers tomorrow. EM currencies are firmer today along with peripheral bonds, but optimism is hanging on the belief that the ECB will deliver some measures to address the euro zone crisis. We are of the belief that any potential ECB actions tomorrow can only address the liquidity issues. It cannot do anything about the solvency issue, which is at the root of the euro zone crisis and will have to be addressed by the politicians. While we are positive on EM longer-term, we think further near-term IDR losses are likely on ECB disappointment.
About Win Thin
Win Thin is the Head of Emerging Markets Currency Strategy at Brown Brothers Harriman. He has a broad international background with a special interest in developing markets. Win received his Ph.D. in economics from Columbia University in 1995, specializing in international and development Economics. He received an MA from Georgetown University in 1985 and a B.A. from Brandeis University 1983.
Like us on Facebook
Follow Edward on Twitter
Latest Subscriber Posts
- Could the US economy accelerate higher in 2014
- Secular versus cyclical factors in equity markets
- Dealing with confirmation bias in macro analysis at market turning points
- Risk for Greece and European periphery from Ukraine crisis escalation mounts
- Economic and market themes: 2014-04-11 – Greece
- Thoughts on Greek bonds, Asian data and resource gamesmanship
- Edward Harrison’s Ten Surprises for 2014, Update 1
- Some thoughts on Ukraine, part 2
- Some thoughts on Ukraine, part 1
- Amazon’s new TV streaming strategy reinforces its incremental approach
- Relief rally in emerging markets
- European, Japanese, and Ukrainian-Russian deflation
- Economic and market themes: 2014-03-28
- The Chinese credit crisis gets messy
- US policy rates and financial stability
Recent Blog Posts
- Four key reasons for capex accelerating
- ECB Action: Just a Question of Time?
- On Europe’s move toward QE to prevent deflation
- The lower bound of central bank effectiveness
- Ten lessons from Charles Keating on corporatism and control fraud
- On the persistence of inadequate ideas like the money multiplier
- Can the Jobs Data Give the Dollar Another Leg Up?
- The US jobs market is healing
- Jumbos still cheaper than conforming mortgages
- Calm before the Storm?
- Eurozone credit contraction continues
- Emerging Market Equity Allocation Model for Q2 2014
- More Thoughts about Potential for QE from the ECB
- The big disconnect between leverage and spreads
- Interest rates and deflation
Daily Links Posts
- What do negative interest rates do?
- A Short History Lesson On Ukraine and Crimea
- Economic consequences of income inequality
- The BoE’s sharp shock to monetary illusions
- Marc Faber: China’s Malinvestment Unwind ‘Will Be a Disaster’
- Another Short History Lesson On Russia and Ukraine
- What are the differences between QE1, QE2 and QE3?
- The long decline of the Great British Pound
- Bank reserves and the falling loan to deposit ratio at US banks
- Four signs of economic slowdown in China
- Turmoil in emerging markets: What’s missing from the story?
- How money matters: The Old Lady fails to get an “A”
- The Dummy’s Guide to the US Banking Crisis
- On Europe’s move toward QE to prevent deflation
- The growing mess which will be left behind by the Abenomics experiment
- Chart of the day: US Manufacturing Employment, 1960-2012
- Bitcoin is not a currency
- Chart of the day: Dow 1928-1932
- More on the failure of Abenomics
- Covenant-light loans are on the rise
-  Crowdfunding Commercial Real Estate with Rodrigo Nino
-  Privatization of Space? and Big Banks in Foreign Policy with Nomi Prins
-  Peter Schiff: It's not the weather, the economy is headed towards recession!
-  The Death of Money with Jim Rickards
-  No Good Greek Current Account Surplus w/Yanis Varoufakis and Tech w/ Alex Daley
-  Paul Craig Roberts: IMF loans will hand Ukraine over to private banks
-  Bitcoin is maturing: Patrick Byrne & Jinyoung Lee Englund on the cryptocurrency
-  Tech Market Bubble? with Alex Daley and Howard Lindzon
-  March Jobs: Half Full or Half Empty? with Daniel Alpert and Max F Wolff
- Ann Pettifor on Constraints on Money Creation and Bancor