Indonesia ETFs Get Rate Hike Respite

June 13th at 2:00pm by Tom Lydon

After a brutal four-week stretch for nearly every major ETF tracking a Southeast Asian country, a couple of funds got some much-needed relief Thursday. In an effort to stem the tide of the following rupiah, Bank Indonesia did something few central banks are doing these days and raised interest rates Thursday.

Southeast Asia’s largest economy and the world’s fourth-largest country by population now has borrowing costs of 6%, up from 5.75%. Bank Indonesia last adjusted rates in February 2012 when pared its benchmark rate to 5.75% from 6%. The news is boosting the iShares MSCI Indonesia Index (NYSEArca: EIDO) and the Market Vectors Indonesia ETF (NYSEArca: IDX) at a critical time. [Indonesia ETFs Ride Growth Wave]

The two largest Indonesia ETFs, the Market Vectors Indonesia Small Cap ETF (NYSEArca: IDXJ) is the other, have been pummeled as investors have rushed to dump emerging markets funds of all varieties. Today, both EIDO and IDX are up more than 2.7%, but heading into Thursday’s session, the two ETFs had each lost more than 13.7% in the past month. [Worst Performing Single Country EM ETFs]

Over the past month, EIDO and IDX have lost more than $69 million in assets combined, according to Index Universe data.  That may not sound like much, but when considering the two ETFs combined have less than $918 million in assets under management, a one-month outflow of $69 million is fairly significant.

Risks remain for the Indonesian economy and the aforementioned ETFs. An imminent fuel price increase, the first in several years, is expected to cause a bump in inflation, something the central bank is trying to mute with the rate increase. On Tuesday, Bank Indonesia announced it would raise the rate it pays lenders for overnight deposits, known as the Fasbi, by 25 basis points to 4.25%, according to Agence France-Presse. That move was aimed at lowering money supply in a bid to support the rupiah.

Obviously, Indonesia ETFs are enjoying the rate hike news Thursday, but the medium-term outlook for these funds is murky. If there is a silver lining for investors in emerging markets currencies and equities it is that developing world central banks are starting to take a proactive approach to their slumping currencies. In addition to Bank Indonesia, central banks in Brazil, India and Thailand have all been active in recent days to keep their currencies from further declines.

Market Vectors Indonesia ETF

ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.