Indonesia's Currency: Asia's Best, Worst and Best Again

Indonesia's stock market is the unlikely star of Monday's rally in Asia. The Jakarta Stock Exchange index closed up 2.5%, leading neighboring Singapore's Straits Times index up 1.2%.

Indonesia, the most-populous nation in the world after China, India and the United States, is easing its coronavirus lockdown in Jakarta. The capital as of Friday permitted some public transport to resume, and allowed access to places of worship, with curbs on numbers. Offices and shopping malls will reopen over the next two weeks.

Indonesia has avoided a nationwide lockdown. The capital, home to some 10 million people, has been particularly hard-hit by the virus, accounting for 28.0% of the country's 31,186 coronavirus cases. There have been 1,851 deaths.

The world's largest archipelago is hard to govern at the best of times. Curbing the spread of Covid-19 across its 17,500 islands is a thankless task, one that raises the prospect of the virus resurfacing once full travel resumes.

The Indonesian rupiah plunged in March to its lowest level against the U.S. dollar since the Asian financial crisis in 1998. Since then, it has rebounded 15%, with a particularly fast pace in June, a rebound that Commerzbank dubs "staggering," at an "unimaginable" pace.

Investors withdrew assets from emerging markets at the height of the coronavirus market panic. Some of that money is now returning, with Indonesia's central-bank governor crediting the country's coordinated monetary and fiscal response. But it's likely that Bank Indonesia will now do its best to prevent further fast gains in the currency, which make Indonesia's exports less competitive.

Asian currencies have gained an average of 4% against the U.S. dollar since their lows in March. That has been driven by the gains in emerging Southeast Asian economies such as Malaysia, Thailand and the Philippines, as well as the electronics exporting nations of South Korea, Taiwan and Singapore. The most-watched Asian currency, the Chinese yuan, has been treading water at 7.10 to the U.S. dollar.

Over the past month, foreign investors bought a net 11.3 trillion rupiah ($797 million) in Indonesian stocks, and 13.9 trillion rupiah ($978 million) in Indonesian government bonds. The Jakarta Composite Index has risen 11.5% since May 20, and 28.7% since its low on March 24. But its recent rally leaves it 18.9% lower than its pre-Covid level, meaning the equity rally may have further to go.

The currency volatility fits a pattern. Prior to Covid-19, the rupiah was the strongest performing currency in the region. That gave way to Southeast Asia's worst performance in the Covid-19 selloff, and now back to top performance again.

From peak to trough, the currency blew out from 13,531 rupiah to the U.S. dollar on January 28 to 16,565 to the greenback on March 24. It is now back to 13,953 rupiah to the dollar.

That's a two-month loss of 22.4%, followed by a 15.8% advance. Foreign investors and central-bank bond buying have driven the moves.

The Indonesian economy looks set to slip from 5.0% growth in 2019 to a 2.3% decline in 2020, according to Oxford Economics. It should then rebound and then some, up 6.6% in 2021.

The growth is coming on the backs of the 268 million people, who have seen GDP per capita rise from $1,783 per person immediately after the Asian financial crisis, where it was at the epicenter, to $3,870 per capita now.

We're always hearing about an "emerging middle class" in emerging nations. But you feel it when you visit a country like Indonesia. There's an obvious gulf between the big cities and the rest, but disposable income is visibly on the rise in urban areas.

The number of households with average annual income of more than $10,000, the traditional cutoff for "middle class" status, has risen from around 6 million homes in 2006 to 31 million now. It is an addition that's equivalent to the total population of the 10-largest cities in the United States, combined, all rising to join the modern world.

Government support for Covid-19 recovery has been smaller in scale than in most Asian nations. The stimulus measures amount to 4.2% of GDP, the lowest in the region. That's in large part due to the government's limited budget - it's on a negative outlook from ratings agencies like Standard & Poor's, at risk of a sovereign downgrade.

Indonesia may be relaxing its lockdown, but it may also be relaxing at the wrong time. The country reported virtually no cases of Covid-19 until the last week of March, which observers considered highly unlikely on the ground. A lack of testing rather than a lack of cases surely explained the low count.

The country entered its partial lockdown on April 10, but only for the capital and surrounding heavily populated areas. It brought in a travel ban into and out of greater Jakarta only on April 21, ahead of Ramadan, when some 20 million people normally move around to celebrate the end of the fasting month with extended family. Foreign passport holders have been barred from entry into Indonesia since April 2.

The emerging middle class is a liability when the richest, most-developed parts of the country are shut down. Consumer spending now equates to 55% of the economy, and the investment bank ING expects consumer sentiment to remain poorly until at least year end.

The number of new daily cases remains persistently elevated at 611, double the rate experienced until it started to rise in late May. ING expects only mild further appreciation in the Indonesian currency, if investors start to doubt the wisdom of easing restrictions and consumers remain skittish.

While the currency is mapping international macro trends, gains in the stock market will likely continue only if the easing measures do not result in an increase in Covid cases. Jakarta may be open again for business, but we shall see if it is wise to do so, so quick.

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