A country that was cruelly dumped by foreign investors last year has now surfaced as an unlikely safe haven amid the rout in emerging markets.

Foreign funds have returned onshore, following reforms that helped improve macroeconomic fundamentals.

This year, Indonesia was the only Asian nation among eight tracked by Bloomberg where foreign investors bought more stocks than they sold, with fund managers dumping US$2.3 billion of South Korean equities and shares worth $1.4 billion in Taiwan, according to data released on Feb. 10.

As of Friday last week, foreign investors have poured at least $1 billion in Indonesian assets into stocks and bonds throughout 2014, propelling the Jakarta Composite Index (JCI) to advance 5.5 percent year-to-date.

It was the strongest performance among 13 countries tracked by the Indonesia Stock Exchange.

Foreign inflows have propped up the rupiah, which has transformed from Asia's worst to best performer in 2014. The rupiah has appreciated 4.3 percent year-to-date to touch 11,716 per dollar on Monday, according to data from the Jakarta Interbank Spot Dollar Rate (JISDOR).

Meanwhile, most of Indonesia's emerging peers are seeing fund outflows and currency depreciation as ongoing financial crises in Turkey and Argentina have triggered broad-based outflows in high-risk assets.

The emergence of Indonesia as a shelter for nervy fund managers also occurred only months after Morgan Stanley included the country and its rupiah on the list of the 'Fragile Five' most vulnerable economies.

However, Morgan Stanley is now encouraging fund managers to return to the archipelago this year as the US-based bank upgraded Indonesian assets from 'underweight' to 'equalweight' last month, citing sound improvement in macroeconomic fundamentals.

'Markets are correctly differentiating Indonesia from other 'fragile' emerging market economies,' said Chua Hak Bin, an economist with Bank of America Merrill Lynch.

'Contagion [from emerging market crises to Indonesia] has been limited, in part because of a healthy balance sheet and low overall leverage,' he noted. 'Indonesia has also undertaken the right policies.'

Analysts have argued that economic reforms pushed by newly appointed technocrats on Indonesia's economic team, namely Finance Minister Chatib Basri, Bank Indonesia (BI) Governor Agus Martowardojo and Investment Coordinating Board (BKPM) chairman Mahendra Siregar, have so far succeeded in restoring policy credibility.

Weeks after Chatib was appointed finance minister in May, the government increased prices of subsidized fuel, a politically painful but crucial move that had helped rein in high oil imports that weighed on the trade deficit.

Chatib also raised import taxes and increased the minimum biofuel content requirement for diesel fuel mixes to ease pressure on the trade balance.

On the monetary front, Agus made BI the first Asian central bank to perform tightening last year, with the 175 basis-point key interest-rate hike to 7.5 percent throughout last year.

Under Agus' headship, BI also deliberately intervened in depreciating the rupiah to push exports and rein in imports, with the weakening currency also making Indonesian assets cheaper and more attractive among foreign investors.

Meanwhile, Mahendra helped open new industries to foreign investors in his revised Negative Investments List (DNI), a move deemed to reassure investors in regard to the government's commitment to reforms amid political uncertainty due to the imminent elections.

Morgan Stanley economist Deyi Tan argued that Indonesia 'is moving in the right direction', while Barclays Bank economist Christian Keller described the country's macroeconomic fundamentals as 'in a better position than six to eight months ago'.

Fund managers turned bullish on Indonesian assets, particularly after the country saw faster-than-expected improvement in its current-account deficit, the major worry among foreign investors last year, analysts have said.

In the fourth quarter, the current-account deficit shrank to $4 billion, equivalent to 2 percent of the gross domestic product (GDP), compared to a record high of $9.8 billion in the second quarter.

Chatib claimed that the latest improvement in the current-account deficit showed the government and BI's success in improving Indonesia's macroeconomic fundamentals, despite previous doubts from
naysayers.

'When our policy package was first released, many asked questions like: Why didn't the rupiah strengthen [at that time]?' the minister recalled. 'But, a policy is not the same as medicine balm, which you can just smear on your skin and suddenly various sicknesses are cured in overnight.'

Popular

Why the Philippines needs dedutertefication

The ART of the bad deal

Four circuit breakers stand between the US-Iran war and World War III