Risks Still Abound in Indonesia

Even with Monday’s losses, the Market Vectors Indonesia Index ETF (NYSEArca: IDX) and the iShares MSCI Indonesia ETF (NYSEArca: EIDO) are off an average of 3.1% this year.

That is a far better showing than almost 9% loss for the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), but it does not mean Indonesia, Southeast Asia’s largest economy, is the emerging markets beacon of stability. The “I” in CIVETS and once thought to be a legitimate replacement for India as the “I” BRIC, Indonesia has found its way into another emerging markets acronym, one of a more infamous variety – BIITS.

BIITS, or Brazil, India, Indonesia, Turkey and South Africa, is more succinctly referred to as the Fragile Five. Despite the best efforts of EIDO and IDX this year, some market observers view Indonesia as the most fragile of the aforementioned quintet. [Some Asia ETFs Rise]

“Capital outflows sparking currency depreciation, with weakened economic growth profiles, have raised doubts over the security of sovereign bonds, especially with debt servicing costs spiralling gently upwards with drifting bond yields” are among the factors hampering the Fragile Five, writes Jeremy Weltman for Euromoney.

The report notes that each member of the Fragile Five resides in Euromoney Country Risk’s third their where a move to the fourth tier could imply a sovereign downgrade. There has been talk of possible downgrades, though such action still does appear imminent, for other BIITS members. [A Problem for South Africa ETFs]

The result of further stress on the Indonesian economy will not be confined to IDX and EIDO. Several bond ETFs also feature significant weights to the world’s fourth-largest country by population. Turkey and Indonesia combine for almost 26% of the iShares Emerging Markets High Yield Bond ETF (NYSEArca: EMHY), making the fund vulnerable to rising yields on BIITS sovereigns. [Wrong Time for This Bond ETF]

EMHY has one of the larger weights to Indonesia among emerging markets bond ETFs, but several other ETFs feature weights ranging from 4% to 5% (sometimes more) to Indonesia and some of those funds have significant BIITS allocations.