The coronavirus pandemic is punishing emerging markets. That match is out in the open, but how various governments in developing markets respond to the crises will determine the near- to medium-term fate of these economies.
One potential bounce back idea among single-country emerging markets ETFs is the VanEck Vectors Indonesia Index ETF (NYSEArca: IDX).
IDX, the original Indonesia ETF, follows the MVIS Indonesia Index, “which includes securities of companies that are incorporated in Indonesia or that are incorporated outside of Indonesia but have at least 50% of their revenues/related assets in Indonesia,” according to VanEck.
“The Indonesian government has taken steps to expand its room for policy maneuver in the face of challenges posed by the coronavirus pandemic, which will reduce its fiscal buffers,” says Fitch Ratings. “The impact of these measures on Indonesia’s medium-term public and external finances will determine how much pressure is exerted on Indonesia’s sovereign rating (BBB/Stable).”
Indonesia has been struggling to cut down its widening trade deficit after reaching a record high of $8.5 billion last year, even with authorities raising import taxes and relaxing export rules to tighten the gap. While current account deficits and the US/China trade war have hampered Indonesian equities last year, 2020 could bring better scenarios for IDX when the COVID-19 outbreak is quashed.
“The government has scrapped temporarily the 3% of GDP budget deficit cap for 2020-2022 to give policymakers greater flexibility in responding to the pandemic,” said Fitch. “The move on 31 March came as part of a wider series of announcements in response to the health crisis, including a fiscal stimulus that officials estimated will push the budget deficit to 5.1% of GDP in 2020, from 2.2% in 2019.”
Indonesia is a major exporter of commodities, including palm oil and coal. Prices on these raw materials have slipped this year on rising speculation of a global slowdown in response to the coronavirus.
“The impact of the coronavirus on Indonesia’s economy will exert rating pressures more broadly in the near term,” according to Fitch. “We expect Indonesia’s growth to weaken to 2.0% in 2020, from 5.0% last year, with significant downside risks depending on the development of the virus and the steps that policymakers take to contain it. Notably, widespread or extended lockdowns could further crimp the growth outlook. Indonesia’s external finances, which are heavily dependent on portfolio inflows.”
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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.