Following talk in May 2013 about the Fed winding down its bond purchases, Indonesia and other emerging markets, especially Brazil, India, South Africa and Turkey, saw capital outflows that led to depreciating currencies and a downturn in stock and bond markets, a series of events referred to as the taper tantrum.

Numerous emerging markets had wide current account deficits at the time. Indonesia’s stood at US$9.58 billion, or 4.26 percent of the country’s GDP in the second quarter of 2013, Bank Indonesia (BI) data shows.

The pandemic, however, reduced the current account deficit to $2.23 billion, or a mere 0.77 percent of GDP, in the second quarter of this year. The narrow deficit was largely the result of trade surpluses, as exports rebounded faster than imports.

“The current account deficit in 2013 was above 3 percent of GDP, while right now, it remains below 1 percent of GDP. This supports external resilience, safeguarding the balance of payments and foreign reserves,” Faisal Rachman, an economist at state-owned and publicly listed Bank Mandiri, told The Jakarta Post on Sep. 8.

Read also: BI to reduce liquidity in 2022 as Fed signals taper

Indonesia’s vulnerability in 2013 stemmed in part from the rise in foreign portfolio investment in the preceding years, when the Fed injected large funds into the US economy in response to the 2008 financial crisis.

In the second quarter of this year, the foreign portfolio investment inflow of $4.67 billion was slightly less than half of the inflow recorded a year earlier, BI data shows.

Nonresidents held 22.42 percent of tradeable government bonds as of Monday, Finance Ministry data shows, which is around 10 percentage points lower than in 2013.

“So the impact will be limited. A large portion of the foreign ownership is foreign central banks,” said Faisal. “Moreover, the majority is long-term [bonds] with a maturity above five years.”

American financial services company Morgan Stanley has Indonesia, Brazil, South Africa, India and Turkey in a group it calls the Fragile Five. Aside from large capital flows and current account deficits, Morgan Stanley cited high inflation as an underlying fundamental weakness of these countries.

However, inflation in Indonesia has remained muted and below the central bank’s target range of between 2 and 4 percent during the pandemic. In August, the consumer price index (CPI) was up just 1.59 percent from a year earlier, Statistics Indonesia (BPS) data shows.

That is a far cry from the inflation around 8 percent logged in the second half of 2013, well above the upper bound of the central bank’s inflation target of 5.5 percent at the time.

Andry Asmoro, the chief economist at Bank Mandiri, said the Fed was expected to start tapering off its liquidity injections next year and tightening the Fed funds rate in late 2023, once the US central bank had seen signs of sustainable economic recovery.

“So, we need to achieve a domestic economic recovery by 2021 or 2022, because the challenges will be different going forward,” Andry said in an online event on Sep. 9. “This assumes there are no new variants that will weaken Indonesia’s and global economic growth.”

Read also: US inflation spike deemed temporary, BI expects no Fed tapering this year

The highly transmissible Delta variant of COVID-19 has forced the government to slash its outlook for this year’s GDP growth to between 3.7 and 4.5 percent, down from between 4.5 and 5.3 percent. The revision points to delays in getting back to pre-pandemic growth near 5 percent.

Tokyo-based financial services group Nomura reported in late August that while the Fragile Five countries had shown some improvements since 2013, weak economic growth, rising inflation and deteriorating fiscal balances formed new sources of vulnerability.

Nomura research analysts said the large fiscal deficits in some emerging markets were expected to lead to sizable current account deficits. But Indonesia was not deemed to be among the countries at high risk of such a double deficit.

“Although it is not unusual for [emerging market] current account deficits to shrink during crises, it is usually a temporary phenomenon. As the crisis abates, alongside policy stimulus, the current account surpluses swing back into deficits. This happened after the [global financial crisis] and is starting to happen this year,” Nomura research analysts Rob Subbaraman and Rebecca Wang wrote in a report released on Aug. 25.

Indonesia’s fiscal deficit reached 6.1 percent of GDP last year, the largest since at least 2010, according to data compiled by the Organization for Economic Cooperation and Development (OECD). 

The government is now seeking to bring it back down below 3 percent of GDP, which is the legal cap under normal circumstances, by 2023. This year’s fiscal deficit is expected to be 5.7 percent.

Financial intelligence firm Moody’s Analytics has predicted that some central banks, including BI, will start raising their benchmark interest rates later this year or in early 2022 as they have faced outbreaks of infection at home.

“In Indonesia, the rupiah's stability is a policy priority. The rupiah will come under rising pressure as the Fed considers tapering,” Moody’s Analytics economist Kathrina Ell wrote in an analysis released on Monday.

“While we do not expect a repeat of the 2013 taper tantrum, financial market dislocation is still a risk,” Moody's economist Sonia Zhu told The Jakarta Post, noting that, this time around, the Fed was providing ample signals ahead of reducing bond purchases.

“However, tapering is only the first step [on] the long path toward monetary policy normalization. Given the uncertain global economic outlook, exacerbated by a fresh wave of COVID-19 infections and variant mutations, the Fed will probably slow its pace of asset purchase such that they do not cause a knee-jerk adverse market response,” she told the Post by email.

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