Citigroup Indonesia Macro Flash - How Externally Vulnerable is Indonesia?

 FX reserve coverage ratios modestly improved over the last year — Looking at a few measures of external liquidity/vulnerability, we find that Indonesia’s FX reserve coverage in terms of short-term debt by remaining maturity and versus total external financing requirements have improved modestly – we estimate that FX reserves over ST debt by remaining maturity (Guidotti-Greenspan ratio) is around 1.54x (1.75x if we exclude standstill debt) as of April 2010, up from around 1.4x (1.7x ex standstill debt) in March 2009. These ratios remain comfortably above the 1x threshold. FX reserve coverage ratio looks stronger if we look at “total external financing requirements” given the country’s buoyant current account (CA) surplus – around 2.1x assuming our CA surplus forecast of 1.2% of GDP in 2010F, though this ratio weakened over the last year given our forecast of a narrowing CA surplus. However, ratio looks much better than Sep-08 levels of 1.75x.

 Indonesia is "relatively" more vulnerable than Asian peers… — Asia is a “tough” comparison given the region’s huge external surpluses and net external creditor status for many countries. Among this “strong” peer group, Indonesia looks “relatively” more vulnerable, alongside Korea. Indonesia is one of only a few countries in Asia (Vietnam is another) where the increase in official FX reserves last year (+$14.5bn) was accompanied by even a larger increase in outstanding external debt (ED) ($17.8bn). Thus, the country’s net external debt position slightly weakened (in contrast to most including Korea), but the increase in the country’s FX reserve exceeded the increase in short-term ED.

 ...but looks stronger than most CEEMEA and some LATAM countries — Nonetheless, Indonesia’s FX coverage ratio looks better than most CEEMEA (Russia is a notable exception) and some LATAM countries. If we take into account the “total external financing requirements” (including the CA), Indonesia’s FX reserve ratio looks relatively better.

 Key to Indonesia's vulnerability are portfolio flows — When we look at FX reserve coverage taking into account foreign holdings of bonds and (nonstrategic) equities, the FX reserve coverage ratio looks weaker (hovering below 1x) and has deteriorated from last year due to strong portfolio inflows. As of April, foreign holdings of IDR government bonds and SBIs have reached a record high or US$25.6bn or around a third of gross FX reserves. Thus, a key factor to Indonesia’s vulnerability will be how “mobile” these portfolio flows are. While foreign holdings in SBIs can be volatile, there is anecdotal evidence that most of the inflows into IDR government bonds are from real money accounts.

 Market implications — While Indonesia’s fundamental developments remain relatively sound (especially fiscally) albeit some recent negative political noise, we think Indonesia will be relatively more vulnerable than “the rest of Asia” on global risk aversion/volatility in capital flows.