Emerging markets on the whole are weak these days, but Indonesia has seen a special level of pain lately.

It’s now fallen 5% on two consecutive days.

So what’s going on?

Morgan Stanley’s James Lord and Kritika Kashyap recently give the big picture overview, coming at the question from the perspective of Indonesia’s plunging currency, the rupiah.

We have been bearish on IDR (Rupiah) for some time, due to Indonesia’s deteriorating current account balance, its commodity exposure to China and vulnerability to external funding shocks, given the high foreign participation in its domestic markets. Recent data have only confirmed our bearish stance on the currency, showing that the country’s macro variables have deteriorated more than we had earlier anticipated. The 2Q13 current account deficit surprised to the downside at -4.4% of GDP (quarterly annualised) versus a downwardly revised -2.6% in 1Q13, and now stands at levels seen around the Asian Financial Crisis (see our economist Deyi Tan’s comment following this strategy section). At the same time, foreign investor sentiment has deteriorated, causing investors to pull out from the domestic equities and bond markets, destabilising IDR further.

Here’s the chart that shows investor money whooshing out of Indonesia. Note that the “flows” are year-to-date, so the recent negative levels haver completely erased months of positive inflows.

And here’s the chart showing the current account deficit falling to levels not seen since the mid-90s.

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