Finally, Good News for Indonesia ETFs

The beleaguered Market Vectors Indonesia ETF (NYSEArca: IDX) and is more downtrodden rival, the iShares MSCI Indonesia ETF (NYSEArca: EIDO) are coming off a third-quarter to forget. However, the two main Indonesia ETFs may have caught a break when Southeast Asia’s largest economy released better-than-expected inflation data during Tuesday’s Asian session.

Just hours after the two ETFs finished the third quarter with an average loss of 22.4%, Statistics Indonesia said that Indonesian consumer price inflation fell to 8.4% in September from 8.79% in August. That is well below the 9.03% September reading economists expected.

The news was well-received. At this writing around 1AM Eastern time, the Jakarta Stock Exchange was up more than 1%. Encouraging inflation data for Indonesia arrived just a day after Goldman Sachs recommended shorting EIDO, the larger of the two Indonesia ETFs, as part of a long/short strategy aimed at capturing profits with select Asia ETFs. [ETFs for Goldman’s Asia Call]

Goldman has an underweight rating on Indonesian stocks. To the credit of IDX and EIDO, the ETFs rose 6.7% and 5.8%, respectively, last month after ranking among the worst-performing emerging market ETFs in August. [India, Indonesia Hardest Hit Among EM ETFs]

The CPI report could not arrive at a better time for IDX and EIDO. Since July, the rupiah has dipped 11%, surpassing the Indian rupee as the worst-performing emerging markets currency, underscoring the notion that Indonesia is highly vulnerable to tapering of U.S. easing. Until tapering talk escalated in May, “the country was able to finance its current-account deficit despite rising imports and falling commodities export prices, thanks to capital inflows chasing higher real rates in Indonesia,” according to Euro Money.

The rupiah’s losses and Indonesia’s widening current account deficit became so severe that Bank Indonesia unexpectedly raised the country’s benchmark interest rate to 7.25% from 7% on Sept. 12. Still, inflation has doubled from last year and the account deficit situation is far from solved, so some market observers are expecting further rate hikes in Indonesia.