Indonesia’s rupiah hits weakest since 1998

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Indonesia's currency tumbled to its lowest levels since the Asian Financial Crisis in the late 1990s on Monday, despite the lack of crisis-like signals.

"The fall in oil prices is spilling over into concerns around government revenues," said Greg Gibbs, senior foreign-exchange strategist at RBS, noting the country is an oil and gas producer. "A lot of currencies are at their weakest in some time," especially energy currencies such as the Australian and Canadian dollars as well as Russia's ruble and Malaysia's ringgit, he noted.

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The U.S. dollar was fetching 12,675 rupiah, off an intraday high of 12,695 rupiah. The 10-year bond yield was around 8.20 percent, compared with around 7.70 percent at the beginning of the month. The country's central bank said it was stepping into the market to smooth volatility in both the currency and to stabilize bond prices, according to Reuters.

"Low oil prices are impacting the whole commodity complex. Indonesia is still a large commodity exporter," said Nizam Idris, head of strategy, fixed income and currencies at Macquarie. In addition, the rupiah faces pressure from year-end position squaring and the market's current risk-off sentiment, he said.

No crisis-like signals

But Idris doesn't see any crisis like signals, although he expects both the rupiah and Indonesian bonds may fall further.

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"It is not quite 1997," with foreign-currency debt actually relatively low now, he said. The 1997-98 Asian Financial Crisis was triggered by the region's foreign-currency debt, which became too expensive when local currencies collapsed and triggered a spike in interest payments.

But that doesn't mean more market volatility isn't on the way, he said.

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Indonesia's corporate debt was around 27 percent of its gross domestic product (GDP) in the second quarter of 2014, compared with around 33 percent in the second quarter of 1997, according to data from Bank of America Merrill Lynch.

"Bond holders are beginning to feel the pain right now," Idris said. "[The rupiah] can easily break 13,000 [against the U.S. dollar] because of bond holders bailing out."

There can be a lot of bailing out. Around $12.5 billion has flowed into Indonesian bonds so far this year, with foreign ownership of government bonds at an all-time high of 39 percent, compared with 33 percent at end-2013, according to data from CIMB.

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Indonesia's bond market has high foreign investor participation, but "that yield coupon is being negated fully by foreign exchange weakness," Idris said.

Morgan Stanley also expects continued outflows from Indonesian bonds, citing the asset's sensitivity to foreign-exchange weakness.

Correction: An earlier version of this story incorrectly cited Goldman Sachs estimates on the impact of a lower oil price on Indonesia's GDP. Goldman Sachs expects a lower oil price may boost GDP due to lower fuel subsidy payments.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1