T

he Indonesian financial markets showed signs of recovery on Wednesday as selling pressure in most emerging markets eased following a massive sell-off over the past few days.

The rupiah, which fell nearly 2 percent to the lowest level in 16 years in the last two days, rose 0.2 percent to 12,658 per US dollar on Wednesday, local exchange rates published by Bloomberg show.

Most Indonesian share prices rose amid improvements in other emerging markets, which largely erased losses suffered over the past few days.

The Jakarta Composite Index (JCI), the main price barometer in the local stock exchange, also rose 0.2 percent to 5,035, reversing a 1.9 percent fall a day earlier.

Signs of recovery were also seen in the debt market: the yield for the benchmark 10-year bonds was steady at 8.44 percent following Bank Indonesia'€™s (BI) intervention.

'€œInvestors with strong nerves can start buying Indonesian equities now,'€ John D. Rachmat, the head of equity and research with Mandiri Sekuritas, wrote in a report distributed to clients on Wednesday.

Bank of America Merrill Lynch reassured that there was no particular domestic factor to justify the rupiah'€™s weakness, while Morgan Stanley had suggested that the recent correction in Indonesian assets defied the market'€™s logic and thus presented buying opportunities.

'€œRegarding Indonesia'€™s specific crisis indicators, I must say the situation is not like it was in 1997. External liability coverage indicators are much better than they were at that time,'€ said Mirza Baig, the head of Asia foreign exchange strategy with BNP Paribas.

'€œA depreciating rupiah is not an indication of a crisis per se but should be seen as a welcome development for improving export competitiveness,'€ he wrote in an email interview from Singapore.

On Wednesday, Indonesia'€™s economic ministers held a limited Cabinet meeting with President Joko '€œJokowi'€ Widodo to discuss the situation in the domestic economy following a sharp fall in rupiah and capital outflows.

'€œIn this kind of opportunity, industry should be encouraged [...] so that the export-oriented industries can move faster and are able to take advantage of the weakening rupiah,'€ Jokowi said as he opened the meeting.

The President, who is seeking to implement a tight budget policy next year and has just cut fuel subsidies, said that the rupiah '€” though weakening sharply against the dollar in recent days '€” actually still fared better when compared to the Japanese yen, the Malaysian ringgit and the Russian ruble.

BI said it had spent Rp 1.7 trillion to buy government bonds in the secondary market within two days amid heavy selling pressure from foreign investors.

Data from BI showed that at least Rp 17 trillion (US$1.3 billion) in foreign funds has been pulled out from Indonesia'€™s equity and bonds markets in December, as fund managers around the world repositioned their riskier asset classes in emerging economies.

Indonesia'€™s five-year credit default swaps (CDS), an indicator of sovereign risk, soared to 182.6 basis points on Wednesday from 136 bps in early December. Higher figures suggest that a country has a higher probability of default.

Nevertheless, the sell-off of rupiah assets and the surging sovereign risk of Indonesia occurred amid improvement in the country'€™s economic fundamentals.

The current account deficit, the major worry among investors, would fall to $6.1 billion in the fourth quarter this year, equivalent to 2.8 percent of gross domestic product (GDP), BI Senior Deputy Governor Mirza Adityaswara said. In the previous quarter, debt was 3.1 percent of GDP.

Mirza said Indonesia might need a '€œslightly undervalued'€ currency to improve its external position, but noted that the recent currency depreciation might have deviated too much from its fundamentals.

'€œWe did perform an intervention when the currency weakened past 12,300 [per dollar]. However, the magnitude of our intervention today was smaller than yesterday,'€ he said Wednesday.