Iraq war to hurt rupiah: Analysts<\/p>\n
Benjamin Pedley, Dow Jones, Singapore<\/p>\n
While the rupiah recovered in recent weeks on negative
\nsentiment toward the dollar after a slew of weak U.S. economic
\ndata, geopolitical factors are conspiring again to create
\nsignificant downside risks for the Indonesian currency.<\/p>\n
The rupiah Tuesday was at a level not traded since before a
\nseries of bomb blasts Oct. 12 on the Indonesian resort island of
\nBali left almost 200 people dead. Foreign investor sentiment
\ntoward Indonesia was damaged by the attacks - whose victims were
\nmainly Western tourists, particularly Australians - as the island
\nhad been a relative safe-haven amid sectarian violence in recent
\nyears elsewhere in the archipelago.<\/p>\n
And with the heightened prospect of military conflict between
\nIraq and Western interests led by the U.S. and U.K. come risks
\nfor the Indonesian currency and bond markets.<\/p>\n
"Indonesia is extremely vulnerable to a deterioration in
\nsentiment in the event of war versus Iraq," said Bank of America
\nin a research report.<\/p>\n
It recommends selling the rupiah against the dollar on any
\nmoves in the U.S. currency below Rp 9,000 with a 2 percent stop-
\nloss on the position and 6 percent profit target "inclusive of
\ncarry."<\/p>\n
At 0200 GMT (9.00 am Jakarta time) the dollar was at Rp 8,990,
\ndown from a post-Bali high of Rp 9,400.<\/p>\n
Weak U.S. economic data hurt sentiment toward the dollar
\nagainst many currencies in the Asia-Pacific, and prompted the
\nFederal Reserve Nov. 6 to slash its target interest rate 50 basis
\npoints to a 41-year low 1.25 percent.<\/p>\n
This widened the margin of short-term Indonesian rates over
\ntheir U.S. equivalent to just under 12 percentage points based on
\none-month rates in Jakarta of 13.1 percent.<\/p>\n
Indeed, this rate gap explains the "slow drift out of
\nexpensive long dollar-short rupiah positions from those banks who
\nunderstandably took a very bearish view on Indonesia following
\nthe Bali bombing," said Bank of America.<\/p>\n
The high cost of funding short positions in a high-yielding
\ncurrency is sometimes referred to as negative carry. The
\ncorollary is positive carry associated with, for example,
\nborrowing yen at near zero interest to buy a financial instrument
\noffering a higher return.<\/p>\n
How expensive is a long dollar-rupiah position?<\/p>\n
Well, this is reflected in the rupiah forwards market.<\/p>\n
If investors want to buy dollars three months forward, they
\nneed to add Rp 280 to the spot price to get their entry point,
\nrising to Rp 565 for six months, and Rp 1,100 for one year.<\/p>\n
Also helping to spur the dollar-rupiah pullback were sales by
\nIndonesian Bank Restructuring Agency, which usually exchanges
\nsome of its dollars into rupiah before it transfers funds to the
\ngovernment. And steady progress in the investigations into the
\nBali blast buoyed sentiment toward the rupiah a little, though
\nthis dynamic could change in a trace in the event of war with
\nIraq.<\/p>\n
Just as events of 9\/11 polarized Western and Islamic interests
\nto the detriment of the rupiah and Jakarta's financial markets,
\nso to would conflict with Iraq.<\/p>\n
Baghdad has made no secret of the fact it will strike Israel
\nif it is attacked, and unlike the Gulf War in the early 1990s
\nJerusalem said it would retaliate this time, increasing the
\nchance other Arab states could be drawn into war.<\/p>\n
The more immediate problem for the Indonesian economy is the
\nBali blasts, which without question was hurt by the attacks as
\ntourism contributes around 4 percent to Indonesian gross domestic
\nproduct, and employs eight million people across the archipelago,
\nsaid UBS Warburg.<\/p>\n
Bali was the most popular Indonesian destination for foreign
\ntourists, attracting 1.35 million of them in 2001.<\/p>\n
Just how much the economy has been hurt is unclear at this
\nstage though most analysts expect the terror attacks will be a
\nserious brake on growth in coming months.<\/p>\n
Third quarter numbers issued Friday showed GDP grew 3.9
\npercent on-year, exceeding analysts' forecasts of 3.4 percent
\nexpansion.<\/p>\n
But these numbers weren't a factor in the rupiah's drift
\nhigher this week, said Jan Lambregts, head of research Asia-
\nPacific at Rabobank Group Treasury.<\/p>\n
Lambregts said what little relevance GDP data has on the
\nIndonesia currency is in terms of what happens in the current
\nquarter and beyond rather than a a growth figure before the Bali
\nterrorist attacks even took place.<\/p>\n
In the medium term, he expects the dollar-rupiah to edge
\nmodestly higher again, as negative sentiment toward the U.S.
\ncurrency peters, and year-end dollar buying by Indonesian
\ncompanies to service foreign currency loans kicks in.<\/p>\n
Moreover, the Singapore-based analyst noted Jakarta recently
\nrevised its exchange rate forecast for this calendar year to
\nRp 9,200-Rp 9,400 from Rp 8,700-Rp 9,000, suggesting some upside
\nrisk for the dollar from here.<\/p>\n
Rabobank said first key resistance for the dollar is at the
\npost-Bali high after which Rp 9,570 would be the next target.<\/p>\n
"We think the dollar is likely to meet intermediate
\npsychological resistance at Rp 9,100 on its move up, after which
\nit could be confined to the Rp 8,950-Rp 9,100 region toward the
\nyear-end," said Lambregts.<\/p>\n
To be sure, such a non-volatile end to the year is a
\npossibility, but this assumes neither the United Nations nor
\nWashington move significantly closer to war with Iraq.<\/p>",
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