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."