(May 18): The Indonesian rupiah hit a record low, stocks slid and bond yields surged as trading resumed after a two-day holiday, with local markets swept up in a global selloff fuelled by inflation fears.
The rupiah dropped as much as 1.1% to 17,658 per dollar on Monday, the worst performer in the region. Equities slumped 4.8% to the lowest in over a year, while the benchmark 10-year bond yield climbed 17 basis points to 6.86%.
The decline in Indonesian assets mirrored the selloff across many other Asian markets that rely heavily on energy imports, leaving their economies vulnerable to higher oil prices due to the Iran war.
“Investors have been concerned over Indonesia’s fiscal position due to the high energy subsidy bill,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group. Higher global yields are adding “pressure on the rupiah as domestic yields will need to rise to make it attractive enough for foreign inflows to be maintained”, he said, forecasting an interest-rate hike on Wednesday.
Fitch Ratings and Moody’s Ratings have both cut the country’s credit rating outlook to negative this year.
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Bank Indonesia is under pressure to step up its defence of the rupiah, which has fallen more than 5% this year, making it Asia’s second-worst performer after the Indian rupee.
The central bank last week pledged to intervene in the foreign-exchange market and optimise all monetary policy instruments to reduce pressures on the rupiah. But some analysts question the effectiveness of those measures at a time when the rupiah is being hit by oil-price shocks and concerns over domestic fiscal policies.
President Prabowo Subianto said over the weekend that there was no need to worry about the weakening rupiah because villagers do not use dollars in their daily lives.
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Indonesian assets’ underperformance versus regional peers likely reflected weaker domestic fundamentals and continued investor caution, said Fesa Wibawa, investment manager at Aberdeen Group plc.
“Positioning in Indonesian government bonds already looks light based on recent price action, but there are limited signs of foreign investors re-engaging meaningfully at this stage,” he said. “For now, markets are closely watching developments in monetary policy and the fiscal outlook, which remain key anchors for confidence in Indonesian assets.”
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