Indonesia’s islands, home to nearly a quarter of a billion people, fan out over an area larger than California, Texas, Arizona and New Mexico combined. This week its Ministry of Finance decided to remind the markets of its importance, telling JPMorgan that fewer of its services will be required in future. The rebuke came after the US investment bank turned bearish on Indonesia’s debt. While hardly laudable, it hints at the ministry’s confidence in the economy.
The sensitivity of Indonesia’s government is understandable. Foreigners hold 40 per cent of its local currency debt. Of its peers, only Malaysia has a greater proportion of overseas creditors. And among Asian emerging market fixed income issuers, Indonesia predominates. A rising dollar, coupled with a declining US Treasury bond market, would have worried all emerging market analysts and fund managers in November following the US presidential election. That month the Indonesian rupiah suffered its largest percentage drop versus the dollar in three years.
For a country angling for credit rating upgrades, all this causes problems. Yet Indonesia protests too much. Most economic trends have moved in the right direction. Its current account deficit has nearly halved as a proportion of GDP (to 2 per cent) since the US Federal Reserve first hinted at interest rates rises back in 2013. Inflation is 3 per cent, towards the bottom of the Bank of Indonesia’s target range. A tax amnesty scheme has brought back offshore savings. Bond prices there have recovered since mid-November.
Never mind its wounded animal roar. Indonesia’s apparent hostility may only reflect a diversification of its banking relationships. JPMorgan’s favoured status may have gone, yet the bank’s importance in EM fixed income markets suggests it will still have a role to play. Indonesia would do well to keep its dignity — and let the economic indicators do the talking.