Emerging markets investors remember all too well the ‘taper tantrum’ of late 2013, when signs of a strengthening US dollar sparked a global rush for the exits of many developing economies. Indonesia, one of the so-called “Fragile Five” EMs due to its high reliance on dollar-denominated debt, is particularly at risk since up to 40% of its government bonds are owned by foreign investors.
Though he claims not to be worried, this problem is surely one of newly-elected president Joko Widodo’s greatest challenges. The country — currently the fourth-most populous in the world — has experienced a staggering amount of economic growth over the past decade, and its creaking power and transportation infrastructure needs billions of dollars in new investment. Late April’s execution of eight convicted drug smugglers may bolster local opinions of Widodo as a strong leader, but a weakening rupiah and decreasing demand for Indonesia’s commodity exports may soon change that image for the worse.