Indonesia's Economy Is Seriously Affected By Capital Outflows.

Affected by the shrinking foreign exchange reserves and the risk of capital outflow, the rupiah will replace Malaysia and become the worst performing currency in Asia in 2016.

The Indonesian rupiah fell sharply this year, with a total decline of 9.6%.

In the face of the Fed's interest rate hike and China's economic growth slowdown, Indonesia's foreign exchange reserves decline and overseas investors hold a larger proportion of national debt, resulting in Indonesia's economy being seriously affected by capital outflows.

As of November this year, the central bank's foreign exchange reserves declined for 9 consecutive months, with a cumulative drop of 10%, shrunk by more than $10 billion, and the scale of foreign reserves fell to its lowest level since December 2013 (see chart).

The decline in foreign exchange reserves will limit the ability of Indonesian banks to maintain their own currencies in the face of the Fed's interest rate increase and the slowdown in China's economic growth, which will further suppress commodity prices, leading to greater currency declines and accelerate capital outflow.

In addition, the proportion of overseas investors holding Indonesian debt is relatively large, which also makes the Indonesian economy vulnerable to capital outflow when the Fed raises interest rates and China's economic growth slows down.

At present, the proportion of overseas investors holding Indonesian debt is 38%, up 1/3 from 5 years ago, and reached the highest value of 40% in January.

By comparison, overseas

The proportion of holding Malaysia's national debt is 31%, and the proportion of holding Thailand's national debt is 15%.

On Monday, the price of the US dollar against the rupiah was 13820.5. In January this year, the price of the US dollar against the rupiah reached its highest level of 14650.

Indonesia's economy has long relied on commodity exports.

In 2014, revenue related to commodities accounted for 21% of Indonesia's fiscal revenue, accounting for 3.1% of Indonesia's GDP.

Indonesian President Joko Widodo is trying to reduce Indonesia's dependence on commodity exports, but this structural pformation takes time, and economists expect only modest improvements next year.

In March this year, the Asian Development Bank predicted that Indonesia's economic growth will reach 5.5% and 6% in 2015 and 2016 respectively. In September, the Indonesian economic growth in 2015 and 2016 will be reduced to 4.9% and 5.4% respectively.

The World Bank says China's demand is declining.

The impact of raising interest rates will continue to challenge Indonesia in 2016, and there will be market volatility.

In addition, despite the fact that public sector spending has been improved, Indonesia still faces the challenge of tax collection and threatens the government's next year's allocation plan. Indonesia's economic growth is expected to be 5.3% next year.

The Indonesian central bank said last Thursday that it expects the economic growth in the next year to be between 5.2%-5.6% and that there will be more room for cutting interest rates.

The rate cut will further weaken the Indonesian rupiah.

The dollar fell to 13871 last week after rising more than 500 basis points against the Indonesian rupiah since November 20th.

Some traders believe that the latest rally may be the influx of foreign capital into the Indonesian bond market, while oil prices are down.

Ringji.

Societe Generale and Bank of Holland both bearish the price of the rupiah against the US dollar at the end of 2016.

According to Bloomberg survey, analysts believe that from November 30th to the end of 2016, the rupiah will fall by 6.2% against the US dollar, or two times that of Kyrgyzstan.

Jason Daw, head of Asia's foreign exchange strategy at Societe Generale, said: "the Indonesian rupiah ranks high in our rankings on the vulnerability of capital flows."

It is expected that by the end of 2016, the bank will fall to 15300 against the US dollar, and only 23 of the 23 emerging countries will be Argentina peso and Brazil.

Roy Teo, senior foreign currency strategist at Holland bank in Singapore, said that after considering the external imbalance, weak commodity prices and the Federal Reserve's tightening monetary policy, overseas investors would sell Indonesian government bonds. The Indonesian rupiah is more vulnerable than other Asian currencies monitored by Holland bank.

The Bank of Holland expects the Indonesian rupiah will fall to 15000 against the US dollar at the end of 2016.

However, Nomura Securities raised the expectation of the rupiah against the US dollar from 15200 to 14850 this month.

Nomura said it was optimistic about the Indonesian economy and the Indonesian rupiah's expectations in 2016, and said that Indonesia's fiscal and monetary stimulus policies had already begun to take effect.