Could religious pilgrims rescue Indonesia from the ongoing emerging market sell-off?
Last year, analysts at Morgan Stanley named Indonesia as one of the “fragile five” developing economies whose currencies were at risk from sharp declines as US interest rates normalized. Like its peers in this group (Turkey, South Africa, Brazil and India), Indonesia has a history of high inflation and a dependence on foreign capital. The Indonesian Rupiah was Asia’s worst performing emerging market currency in 2013, as investors latched onto this theme, and has fallen by about 24% against the US dollar over the past 12 months.
But Indonesia is also the world’s most populous Muslim nation. And as a consequence, it might have found an ingenious way to reduce its reliance on other economies. As the Financial Times reports (paywall), the country’s religious ministry has built up $5.4 billion in reserves from deposits made by the millions of its citizens seeking to make the pilgrimage, or Hajj, to Saudi Arabia each year. The waiting list for the Hajj, a key aspect of the Islamic faith, is reportedly 12 years long; the millions of Indonesians seeking to join the list must each pay a deposit of 25 million rupiah ($2,125).
The administration of Hajj deposits in Indonesia by religious authorities has long been criticized. A New York Times report in 2010, which cited investigators and anti-corruption watchdogs, claimed that government officials and politicians had misused the money to “fatten their own pockets.” In 2012, the government appointed a former finance ministry official to administer the Hajj funds and shield them from corruption.
Last year, the Hajj department began to invest in Sharia compliant bonds issued by the Indonesian government. Like its neighbor Malaysia, the country is now setting up a Hajj financial management agency, which could realistically play a key role in developing the country’s Islamic finance markets and reduce its reliance on offshore funds.
“One of the risks to the Indonesian economy is that we rely on foreign bondholders and that makes us vulnerable,” Indonesian finance minister Chatib Basri told the Financial Times. “Now we’re trying to diversify the source of funding away from global bonds and we’re working with the religious affairs ministry on the Hajj fund.”
It’s worth remembering that the Indonesia’s foreign debt load stood at around $260 billion in September last year, so there’s a very long way to go before it can truly expect to rely less on offshore funds. But you’ve got to start somewhere, and with Hajj funds expected to triple over the next decade, it could be a promising development.