Analysts upbeat about rupiah recovery

Analysts upbeat about rupiah recovery

SINGAPORE (Reuters): The accord Indonesia signed with the IMF in June assumed that the rupiah would recover to 10,000 to the dollar by the fourth quarter of this year, a target analysts labeled "optimistic" at the time.

However, bumper amounts of dollars are rolling in and the latest developments from talks with international donors in Paris look like ending with another $6 to $8 billion heading for Indonesia's coffers.

Such a disbursement would come on top of a $6 billion IMF-led lending package announced on July 16, which was itself in addition to an original $41 billion package.

Indonesia's Coordinating Minister of Economy, Finance and Industry Ginandjar Kartasasmita told journalists after a meeting with donors on Wednesday that the government would use most of the Paris cash to pay for central bank purchases of rupiah in the foreign exchange market.

He also said the rupiah's weakness was Indonesia's "main source of problems" and hoped the buying would boost the currency by around 25 percent to about 10,000 per dollar by the end of the fiscal year in March.

On the face of it this might seem like a bad idea given that billions of dollars have in the past been wasted in trying to support the rupiah, but the plan is actually doubly good, say analysts.

The government will need to convert the dollars into rupiah because the cash will finance infrastructure projects and subsidies for basic needs in Indonesia.

The rupiah purchases are necessary and they will have the added benefit of supporting the beleaguered Indonesian currency.

"We are going to have some serious net inflows of dollars in the next few months, especially from the IMF," Daniel Lian, head of Asian markets research at ANZ Investment Bank in Singapore, told Reuters Television.

"From a foreign reserve position the rupiah should actually strengthen and we have been making the call that the rupiah is a fantastic buy at 15,000 and I think the rupiah will strengthen to the 10, 11, 12,000 level in the next six months.

On Thursday the rupiah was at 13,000, having moved up steadily from 15,000 per dollar earlier this month.

And analysts say that the frantic dollar-buying spree that began with the start of Asia's financial crisis a year ago and slashed the value of the rupiah by 80 percent is tapering off.

They say that while indebted corporates had been scrambling to find dollars to pay off loans that have been getting larger in rupiah terms as the currency fell, they are not doing so now to any great extent.

Loans have been rescheduled so the dollar buying has slowed to a trickle.

"The major outflow you are going to see is the repayment of outstanding foreign debt, but they have already rescheduled the banks and they have agreements on the trade finance side," said Chiang Yao Chye, head of Asia Pacific research at CIBC in Singapore.

"There will be more detail in the coming months of what's happening with corporate debt so with that kind of a structure there is no reason for anyone to rush out to convert rupiah into dollars to repay debt."

Analysts also noted that with short-term money rates at over 50 percent in Indonesia there is good reason to be long of rupiah.

The IMF would seem to agree with the analysts and this week senior IMF official Hubert Neiss said an exchange rate of around 10,000 rupiah to the dollar was a "reasonable assumption" by the end of the current fiscal year.

"I think this is still a reasonable assumption, or a possible assumption, and... prospects are now more favorable for a recovery of the rupiah because there will be ample inflows of foreign official money," Neiss told Reuters Television in an interview.

Analysts said Indonesia could decouple from the rest of Asia to some extent because the 80 percent depreciation of the rupiah was not in line with the 20-40 percent drops seen elsewhere.

As long as Indonesia can get its runaway inflation under control -- year on year inflation was running at 60 percent in June -- there is no reason the rupiah cannot recover, analysts said.

But analysts did sound a note of caution and said the rupiah could start to sag again if economic conditions do not improve enough to boost confidence among overseas investors so non-aid dollars start to flow back into the country.

The trade surplus should continue at a sizable level so dollars will flow into Indonesia, but future inflows may not be sufficient to offset any lack, or a slowdown, of further funding.

"The rupiah might start to come back again after the end of the fiscal year unless we have corresponding inflows by virtue of a recovery in confidence by overseas investors," CIBC's Yao Chye said.

"That is something that remains to be seen."