Why an Emerging Market Rout Has Hit Indonesia So Hard

As a financial crisis in Turkey shakes global emerging markets, Indonesia is taking a bigger knock than its peers in Asia. The rupiah slumped to an almost three-year low against the dollar and stocks are being dumped. The central bank is selling billions of dollars from its reserves to halt the rout and has raised interest rates four times since mid-May.

Even before the Turkey crisis, emerging markets were under pressure because of rising U.S. interest rates and a stronger dollar. Part of the appeal of emerging markets is their relatively higher yields compared with developed markets. When that differential falls because of the U.S. Federal Reserve raising borrowing costs, emerging markets become less attractive. The turmoil in Turkey adds to emerging-market woes because it reduces investors’ appetite for risky assets and accelerates the movement of foreign capital from higher-yielding securities to relatively safer ones in developed markets.