Why Indonesia is on the brink -- again



Posted by Ed 5 mths ago
As its financial markets plummet, Indonesia has an excess of deja vu

Two decades ago, the Asian financial crisis revealed Indonesia to be the weakest link. While the trouble started in Thailand, it was the collapse of Jakarta's financial system that generated full-blown contagion.

Indonesia experienced another reckoning in 2013 as the Federal Reserve's "taper tantrum" savaged emerging markets. Again, its frailties surged to the surface, unnerving neighbors. Fast-forward five years and President Joko Widodo's economy is back on the brink. And, once again, it could be a chaos transmission mechanism at the heart of the globe's most dynamic region.

That is the finding of an Oct. 23 Institute of International Finance report on systemic risk among emerging nations. IIF researcher Reza Siregar concludes that Indonesia suffers more acutely than neighbors from "concentration risk" that "increases the scope for contagion."

He is referring to a banking sector, and an entire economy, overly exposed to a single counterparty, China. "Indonesia flows are quite sensitive to China shocks," Siregar warns.

Thanks to a heavy reliance on capital inflows into government debt, corporate IOUs and stocks, Indonesia is again proving, in Siregar's words, "more sensitive to shifts in risk appetite than dollar flows." In other words, vulnerable to panicky punters seeking shelter as China's economy grows wobbly.


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