SEOUL, June 30 (AJP) - Crisis-era exchange rates and relentless foreign stock selling have become familiar headaches for policymakers in both Indonesia and South Korea. At first glance, the two economies appear to face the same challenge. A closer look tells a different story.
The Indonesian rupiah's slide to record-low territory has revived memories of past currency crises, putting renewed pressure on Jakarta as investors question whether the country's external buffers are strong enough to withstand a prolonged selloff.
The rupiah weakened beyond 18,000 per U.S. dollar this month, its weakest level on record, making it one of Asia's poorest-performing currencies this year.
The decline reflects far more than broad dollar strength. It has coincided with persistent foreign selling of Indonesian equities, concerns over fiscal discipline, a widening current account deficit and uncertainty over the country's status in MSCI's emerging-market indexes.
Taken together, those factors have made the rupiah's weakness far more than a routine exchange-rate adjustment, even if Indonesia is nowhere near a repeat of the 1997-98 Asian financial crisis.
The first fault line is the current account.
Indonesia posted a $4 billion current account deficit in the first quarter, equivalent to 1.09 percent of gross domestic product, according to Bank Indonesia. The central bank expects the deficit to remain between 0.5 percent and 1.3 percent of GDP this year.
A current account deficit is not inherently alarming. But it leaves the economy dependent on continued capital inflows to finance its external position — a more difficult proposition when foreign investors are already withdrawing from local financial markets.
Indonesia's equity market has come under sustained pressure this year, with foreign selling further boosting demand for dollars. Investors have also grown increasingly cautious as MSCI continues to review Indonesia's market classification.
The index provider has extended its review until November, leaving unresolved the possibility that Indonesia could lose its emerging-market status.
Kim Geun-a, an analyst at Hana Securities, said in a recent report that foreign investors are likely to remain cautious until Jakarta demonstrates that promised market reforms have been implemented.
She added that delayed foreign inflows could place additional pressure on the rupiah, particularly as Indonesia's foreign exchange reserves have declined.
The country's reserves stood at $144.9 billion at the end of May, down from the previous month. Bank Indonesia said the stockpile was sufficient to cover 5.6 months of imports, or 5.5 months of imports and government external debt repayments.
While that remains comfortably above the widely accepted adequacy threshold of three months of imports, the recent decline has focused investor attention on how much room the central bank has to defend the currency should depreciation pressures persist.
Bank Indonesia has already moved into full defense mode.
The central bank raised its benchmark BI Rate by 25 basis points to 5.75 percent at its June policy meeting, citing the need to stabilize the rupiah while keeping inflation within target.
It has also intensified intervention in both spot and derivative currency markets while adjusting yields on rupiah-denominated securities to attract foreign portfolio investment.
Taken together, the measures underscore that policymakers view the rupiah's weakness not simply as a currency-market issue but as a broader threat to capital flows and investor confidence.
Fiscal policy has emerged as another pressure point.
The Korea International Trade Association's Jakarta office has identified concerns over fiscal discipline and policy credibility as additional factors weighing on the rupiah. President Prabowo Subianto's ambitious spending plans could require greater government borrowing and increased bond issuance, raising questions about fiscal sustainability and the risk premium demanded by investors.
Those concerns have already forced Jakarta to scale back one of Prabowo's flagship initiatives.
The move does not amount to an abandonment of the policy. It does, however, illustrate how currency weakness, fiscal pressure and investor concerns over policy credibility are beginning to constrain even politically important spending priorities.
For now, Indonesia retains substantial buffers. Foreign exchange reserves remain above internationally accepted adequacy levels, inflation is under control and the central bank has demonstrated its willingness to use both monetary policy and market intervention to support the rupiah.
The country's challenge is better described as a classic emerging-market stress test: a weakening currency, current account deficits, sustained foreign portfolio outflows and mounting questions over policy credibility occurring simultaneously.
South Korea illustrates why not every sharp currency depreciation carries the same implications.
The Korean won has also ranked among Asia's weakest currencies this year. On Tuesday, it briefly weakened beyond 1,550 per dollar during intraday trading for the first time in 16 sessions before ending at 1,549.4, down 4.2 won from the previous session. The rupiah, meanwhile, hovered near 17,900 per dollar.
Korea's external fundamentals, however, remain fundamentally different.
The Bank of Korea said the country recorded a $28.29 billion current account surplus in April, supported by recovering semiconductor exports and a stronger goods balance.
Its foreign exchange reserves stood at $427 billion at the end of May—roughly three times Indonesia's holdings.
That does not mean the won's weakness is inconsequential.
The result is a domestic dollar market that appears tighter than the country's overall external position would suggest.
At first glance, the won and the rupiah tell the same story: weak Asian currencies struggling against a strong-dollar environment.
The underlying economics, however, are fundamentally different.
Indonesia remains dependent on sustained foreign capital inflows to finance its external deficit while preserving investor confidence in fiscal policy.
South Korea, by contrast, continues to generate sizable external surpluses and maintains ample foreign exchange reserves. Its challenge is not attracting dollars but channeling them back into the domestic market.
Both currencies now trade near levels last seen during Asia's financial crisis. But one reflects pressure on external financing and policy credibility, while the other reflects a structural transformation in capital flows.
That distinction makes all the difference.
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